05 October 2016

Aligning Interest With Shareholders

One of the most important factors to be considered before investment in companies is whether or not the interest of the CEO are aligned with the shareholders. Its important becauase as a shareholder, we do not want our money to be mis-managed by the leaders of the companies.

Most of the time, how the CEOs are being remunerated are based on the performace he/she able to bring to the table of the company he/she runs.

For example, is the CEO able to help the company increase revenues,what are the cost cutting strategy he/she adopting if the company is in losses, is he/she able to increase EPS (earnings per share). To keep it short and simple, the main objective is NET PROFIT for the company.

Having said that, some of the ways to know whether or not the interest between shareholders and CEO are being aligned are as follows:

1) does the CEO has shareholdings in the company he/she runs
2) does he/she deliver promises to shareholders
3) does the company pay out dividends to shareholders (what are the payout ratio? if no, why not?)
4) does the CEO think from the perspective of the shareholders etc.

Above listed are some and certainly there are more than that.

Do let me know if you do know more than that or comments if you have any.

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