Paradox or Plurality?

This article is a deeper dive into one of the themes we introduced in our white paper this past summer. To read Owners Vs. Agents, please click here for access at the International Review of Financial Analysis.

We have some surprising new data to share with you today on owner operators. Before we get to the new data, first it makes sense to put this new data in context.

A Paradox?

“The paradox is the source of the thinker’s passion.” -Søren Kierkegaard

We have a fairly public debate ongoing with Swatch over corporate governance. Our view is that all shareholders matter. And yet, we also published a white paper this last summer about how owner-managed companies massively outperform global benchmarks.

In some conversations we’ve had with stakeholders, they sometimes wonder if this is a paradox — we are challenging the governance of a family operated business, with those family members intimately involved in the daily management of the company. Yet, we support owner managed businesses? Yes we do. But we also believe every shareholder matters.

In a prior post, we had already talked about how sometimes the owner managing the company is a positive, but often they can be a negative. We see this particularly in nano-cap land, where the longevity of the salary is often more important than the value of the ownership. Whether it’s entrenchment or also sustained underperformance, independent directors have typically helped balance other shareholder views, the silent majority, with the one that is occupying a chairman or CEO role.

As a result of the most recent ongoing public debate, we wondered, is there are a way to systematically identify managers that are more often a positive than a negative? In practice, we often have graded the person based on how open they are to critical feedback, and independent perspectives. 

This is often more important than their prior track record, as executives can often become more confident in their own abilities later in their careers. If they remain open-minded after initial successes, it is a surer sign of both their own self confidence, but in their ability to create an ownership culture within their team. 

In our experience, all the under-performing owner operators typically function more like a monarchy than an actual public company. There is no dissent, just the one voice that has successfully sealed control of the management and an often silent board. If an executive is not listening to his own team members, you can be sure he or she is also not listening to their customers, employees and partners. 

If this feature is more the rule than an exception, we don’t know. We’re unsure if this is the primary or differentiating feature that turns an owner operator into a liability as opposed to asset, but in our experience with unsuccessful outcomes with owner operators (more than just a handful), the monarchy has been the common denominator.

A Prince’s View

“It is legal because I wish it.” -Louis XVI of France

We certainly know this is the view of Swatch’s management. Our efforts are derided by them as someone “who buy[s] shares solely with the aim of quickly increasing their value and cashing in profits just as quickly.”

This completely ignores our track record, low portfolio turnover, and long board tenures. Our firm has owned shares of CTT and Leonardo for a total of 17 years, and I’ve been on the boards of both for 10 of those years. My shortest tenure, at MEI Pharma was 2 years, and ended because we successfully concluded a strategic alternatives process — which very clearly maximized value for shareholders.

Furthermore, the fact that we “only” own 0.5% of voting shares outstanding has been dismissed as being small and not relevant. In an interview, Nick Hayek has said, “In any case, our stake is more than the 0.28% of share capital the activist American investor has acquired — if what he has communicated is true.”

This sentiment pairs perfectly with the sentiment expressed in a prior interview with NZZ where he claimed that shareholders aren’t equal co-owners to their own position (see slide 9 here).

Apparently this view was justified by the fact that his father put capital into the company, and that minority investors didn’t.

This not only defies all basic economic principles, but ignores the fact that his position was inherited, much in the same way a prince inherits a title without merit or qualifications. Somehow that inherited shareholder view is more important than the hundreds of thousands of other shareholders and stakeholders that have endured a lost two decades in shares of Swatch?

We’re sorry, no. And it turns out the research is on our side.

Governance Rooted in Research

“When descendants serve as CEOs, firm value is destroyed.” -Villalonga & Amit (2006)

Belen Villalonga and Raphael Amit have been among the more prodigious scholars studying the link between firm performance and ownership. Their study, “How do family ownership, control and management affect firm value?” has been the 4th most-cited academic work that uses a data-based approach to quantifying the benefits or detriments of ownership and firm performance.

Their findings were not only clear and statistically-significant, at a 99% degree of confidence, but the data also helped clear up prior disagreements of other family-focused studies which have sometimes showed mix results.

Villalonga and Amit separated Fortune 500 firms between 1994-2000 and differentiated the family firms based on whether or not the founder was still managing the firm, or if their heirs were at the helm. The results weren’t just different between founders and their heirs – but they were at opposite ends of the spectrum. Founder-CEOs had a major premium on valuation and performance, while descendant-led firms had a massive discount on valuation and performance relative to the non-family firms.

Furthermore, the duo found that even “Founders create the most value when no control-enhancing mechanisms, such as multiple share classes with differential voting rights, pyramids, crossholdings, or voting agreements, facilitate the expropriation of nonfamily shareholders.”

So our challenge to Swatch is less a personal challenge and more of a fact-based analysis of how governance works best. It works best, in our opinion, when multiple — if not all — shareholders have a material influence on the governance of a firm. When only one shareholder has all of the influence, the mechanism between accountability, merit, and performance breaks down.

This view is further backed by the iconic paper written by Morck, Shleifer & Vishny (1988). Their paper, Management ownership and market valuation: An empirical analysis, is the most-cited academic work studying the links between firm management and ownership, with over 12,000 academic citations.

In their research, they showed how firm valuation improves when managers of the firm own a 0-5% stake in the firm — much better than in the cases where management owns no shares. Yet, the entrenchment zone appeared to be prominent between 5-25% ownership of the firm. Beyond 25% ownership, managers interests re-converge with “minority” shareholders, as there are fewer and fewer minority shareholders to externalize expenses and underperformance upon. They are the primary beneficiary or loser of their own track record.

Exhibit 1: Morck’s Relationship Between Ownership Levels & Firm Valuation

Rounding out our review of prior research regarding governance, we’ve previously referenced work by Maury & Pajuste (2005), Multiple large shareholders and firm value. The pair of researchers found that three block-holders, which collectively own less than 50% of the firm, were far better than instances where a single shareholder owned over 50% of the votes.

Exhibit 2: Valuation (Tobin’s Q) of Firms by # of Key Shareholders 

Digesting these three studies, we can make three data-driven conclusions: First, founders are better than their heirs, and in fact, heirs often destroy firm value. Second, multiple shareholders on a board are better than a single shareholder. And third, managers that own between 5-25% of the voting shares are particularly dangerous as they can become susceptible to entrenchment, and remain unaccountable for their performance.

All three of these very highly-referenced works have been proven out by Swatch’s second generation. But we would go further. We don’t believe only block-holders or major shareholders are the ones that matter. In fact, it would seem to us, that the best insights often come from the smallest shareholders.

Emerging Masters

“Big institutions don’t have an edge in understanding companies. Often they’re the last to know what’s really happening.” -Peter Lynch

We know hundreds of emerging managers that manage under $100 million in assets under management. It would be a grave mistake to confuse this small size with a limited ability to contribute to the underlying investment’s performance.

In fact, these managers, often with even more of their personal capital on the line, not to mention their reputations, will often know their underlying investments better than the average shareholder. In many cases, they know the competitive situation better than the actual board members that are appointed to represent these shareholders.

This has apparently been the case for decades, with even the great Peter Lynch having a similar observation decades ago. Size of shareholding almost never correlates with knowledge, strategic insight, or accountability. Many of them spend hundreds of hours, if not maybe even thousands of hours, underwriting the investment before they commit the capital.

Institutionally, however, these “small” shareholders are almost always overlooked. Whether or not it’s with board members, management teams, or advisory companies, the small shareholder — like us in the case of Swatch — is routinely dismissed as second-class relative to the large shareholders of scale.

But in the modern world of passive funds, the largest shareholders are often the ones that have thought about the competitive dynamic and management quite a bit less than the smaller ones. Thus, while the Peter Lynch observation from decades ago was speaking to the same phenomenon, his observation is even more important in today’s world of large pools of capital being robotized.

We’ve often found in our own case, and on the boards where we serve, the most game-changing insight will come from the least likely source, or from some of the smallest investors. Their insights have been invaluable and have led to billions of dollars in value created on behalf of their other shareholders. They don’t ask for recognition or compensation, for their capital has appreciated as their insights have been implemented.

The plurality of views is better than any singularity, and the same evidence has been shown to work in team-managed funds relative to single-managed funds. In their paper “To Group or Not to Group? Evidence from Mutual Fund Databases,” Saurin Patel & Sergei Sarkissian have also shown that mutual funds that have multiple portfolio managers outperform those with single managers.

Thus, the plurality of views is not just helpful in the context of corporate governance, but also investment fund performance.

Exhibit 3: Team Managed Fund Annual Alpha Relative to Single-Manager Funds

We feel so strongly about this plurality of views improving our own investment outcomes and corporate outcomes, that years ago we added “collaborative” as being a core principle of GreenWood. Half a decade and a few board mandates later, we stand by this principle more than ever.

But just like our efforts to quantify the ownership premium for companies, we also wanted to prove out our views with data — as opposed to simply use anecdotes and personal experience.

Pluralities are Better Than Princes

“The better approach, I believe, is to accept that we can’t understand every facet of a complex environment and to focus, instead, on techniques to deal with combining different viewpoints. If we start with the attitude that different viewpoints are additive rather than competitive, we become more effective because our ideas or decisions are honed and tempered by that discourse. In a healthy, creative culture, the people in the trenches feel free to speak up and bring to light differing views that can help give us clarity.” -Ed Catmull, Creativity Inc

We took the opportunity to re-cut the original data-set we used to publish our white paper on Owner Operators. We separated inside ownership by number of primary insider owners that had meaningful stakes. What we found was surprising. The very clear trends supporting a plurality of ownership is self-evident, without having to elaborate.

Before cutting the data, we didn’t expect to find such unfiltered clarity in the trend line, but simply looking at the data, you don’t even need a correlation to know that the more separate insiders that own a meaningful stake, the better the total shareholder returns.

Exhibit 4: Owner Operator Annualized Total Shareholder Returns Based On # of Insiders

The correlated data is staggering. On a 10- and 15-year basis, positive shareholder returns are correlated to the number of significant insider owners at a 99% level. Note, this is much stronger than the statistical significance, as it’s the actual r-squared. On a 20-year basis, the correlation coefficient is 92%, which is still staggering in a data set of over 1,200 companies.

We also isolated the data for a second shareholder owning “only” as much as 0.5%, as is the case with us at Swatch. Even then, the second inside shareholder mattered. That second shareholder’s views were able to add 120% total TSR over 15 years and 370% in total shareholder returns over 20 years.

Stretching the analogy a bit further, that would mean that from 2005-2025, giving that 0.5% minority shareholder a voice on the board of Swatch, according to the data, would yield a stock price 370% higher than today. That would mean the shares would have better kept pace with its closest peer, Richemont.

Exhibit 5: Swiss Watchmaker Stock Performance 

So yes, 0.5% shareholders matter despite the heirs of Swatch publicly criticizing otherwise.

To us the right question to ask is not the size, but rather, the time horizon. Short-term investors have no incentive to optimize for long-term value for the company — as the short and long-term are often at odds with each other.

Swatch’s CEO likes to dismiss all shareholder criticism as “short-term” thinking, and then he’ll often reference something his dad said 15 years ago.

Meanwhile, while the company has been anchoring on 15 years ago, nearly that exact period has become a lost, if not painful, decade and a half as Richemont and other luxury peers have updated their strategies for the modern era with their more diverse boards, management teams and strategic perspectives.

As Richemont and modern luxury companies know, pluralities matter.

Every long-term shareholder matters.

We stand with them, because we are them.

And we look forward to defending our rights in 2026.

Disclaimer:

This article has been distributed for informational purposes only. Neither the information nor any opinions expressed constitute a recommendation to buy or sell the securities or assets mentioned, or to invest in any investment product or strategy related to such securities or assets. It is not intended to provide personal investment advice, and it does not take into account the specific investment objectives, financial situation or particular needs of any person or entity that may receive this article. Persons reading this article should seek professional financial advice regarding the appropriateness of investing in any securities or assets discussed in this article. The author’s opinions are subject to change without notice. Forecasts, estimates, and certain information contained herein are based upon proprietary research, and the information used in such process was obtained from publicly available sources. Information contained herein has been obtained from sources believed to be reliable, but such reliability is not guaranteed. Investment accounts managed by GreenWood Investors LLC and its affiliates may have a position in the securities or assets discussed in this article. GreenWood Investors LLC may re-evaluate its holdings in such positions and sell or cover certain positions without notice. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of GreenWood Investors LLC.

Past performance is no guarantee of future results.