Where should I put my Christmas tree?
Here's how Jeff Bezos (founder of Amazon) began his letter to shareholders in 2003. Even though that letter is more than 20 years old, its content remains highly relevant today.
Mr. Bezos goes on in the letter to tell a story about a couple he knows. That couple rented out their home (this was 5 years before Airbnb was founded) during the Christmas season. Of course, Christmas wouldn’t be complete without a Christmas tree. I think most people put their Christmas tree in a large pot or basket, or on a real Christmas tree stand. Unfortunately, the renters didn’t have either of those on hand and thought the best solution was to nail the Christmas tree’s roots to the house’s hardwood floor. A unique method, but one with the major drawback that, after the Christmas season, there was obvious damage to the home’s hardwood floor.
Bezos used this story to illustrate that homeowners would never do this because they understand that the floor has to last for many years. Tenants, on the other hand, only live there for a limited time and therefore, by definition, think only in the short term.
Drawing an analogy with this story, Bezos argued that many investors behave like tenants (holding stocks for the short term and then moving on to the next one). In the 2000s, the average time an investor held a stock was just over a year, whereas twenty years later, we’re talking about months and even weeks (source: NYSE, Refinitiv).
The analogy can also be extended to a company’s managers and even its board of directors. This is why we place particular importance on “skin in the game’. ““Skin in the game” means that you personally take a risk or have something to lose depending on the outcome of a decision or action you take. In the business world, this translates to managers who own (a significant number of) shares in the company they lead.
Imagine two CEOs. They both earn a salary of EUR 500,000. The first CEO does not own any shares in the company he manages, and the second CEO owns shares worth EUR 5,000,000.
When asked which CEO will be most committed to shareholders, most people will immediately think of the second CEO. Because of his significant stake in the company’s stock, such a CEO will automatically be more focused on the long-term well-being of his company. The CEO who is focused solely on his year-end bonus—and who, as a result, will make more short-term decisions—is more likely to be the first CEO. However, such short-term decisions can have negative long-term consequences.
Skin in the Game
Finally, this also applies to the Board of Directors. A body that is tasked, among other things, with representing the interests of all shareholders can also benefit from “skin in the game.’ The renowned Warren Buffett stated in his 2019 letter that today, members of the Board of Directors are encouraged to be independent and therefore often do not own shares in the company on whose board they serve. Board members who hold a large number of shares are often labeled as non-independent. According to Buffett, this is the world turned upside down. Members for whom the board’s compensation is a significant source of income will be far less inclined to speak up when the company is not performing well, for fear of losing their seat. Members who have just invested a large portion of their wealth in the company’s stock will be more inclined to push for change if the company is heading in the wrong direction.
I’d like to conclude this article the way Bezos concluded his 2003 introduction: “Here’s to not being a tenant!”
Disclaimer: This blog post is for informational purposes only and does not constitute investment advice, an offer, or a recommendation. Past performance is not a guarantee of future results.
