By Lawrence A. Cunningham
Individual investors wonder what to look for in a company’s board members. The most important thing is to find directors who look out for shareholder interests. The strongest objective signal of this is their ownership of a significant long-term stake in the company.
It stands to reason. Directors will act most like shareholders when they are shareholders; the higher the stakes, the more passionate the stewardship. One proving ground is venture capital, where the effects of a company’s major shareholder-directors are clear.
The standard-bearer here is the legendary George Ohrstrom (1927-2005). Through his venture firm, Ohrstrom sagely guided the incubation of such durable companies as Carlisle /zigman2/quotes/206929371/composite CSL -0.39% , Dover /zigman2/quotes/208444467/composite DOV -0.82% and Roper Technologies /zigman2/quotes/204270015/composite ROP -0.09% . While no intelligent investor blindly follows others or simplistic formulas, paying attention to what the Ohrstroms of the world do pays.
Beyond venture capital, research indicates that among large public companies today, a high proportion of patient and focused shareholders — “quality shareholders” — correlates with superior corporate performance. In companies that lead the charts in both shareholder quality and performance, a common feature is at least one director with large long-term personal stakes.
Some CEOs publicly attest to the value of such directors. One is Mike Jackson, CEO for more than 20 years at AutoNation /zigman2/quotes/208363778/composite AN -2.24% . The company, owner of a vast network of car dealers, attracted an impressive list of quality shareholders over those decades. From among these, two joined the board, whom Jackson credits with vastly improved corporate performance. Each held 15%-16% of the stock for more than a decade: investor Eddie Lampert tutored board colleagues on capital allocation and Michael Larson of the Gates Foundation counseled them on disciplined, patient long-term thinking.
The board of Credit Acceptance Corporation /zigman2/quotes/200645359/composite CACC -0.82% , lender to sub-prime borrowers, boasts two quality shareholders: Scott Vassalluzzo, of Prescott General Partners, which owns 10% of the stock, and Tom Tryforos, who teaches the fundamentals of traditional investing at Columbia Business School. CEO Brett Roberts attests to the enduring value of their board service, stressing in a shareholder letter how Tryforos’s perspective as an investor helped managers appreciate that all corporate decisions must be tested in terms of a minimum return on capital.
Many other companies adept at attracting quality shareholders have named some to their boards: Berkshire Hathaway /zigman2/quotes/208872451/composite BRK.A -0.33% /zigman2/quotes/200060694/composite BRK.B -0.20% in 2005 appointed Sandy Gottesman of First Manhattan, since 1966 the company’s largest shareholder after Warren Buffett; Constellation Software /zigman2/quotes/207942620/delayed CNSWF -0.18% has since going public in 2006 benefited from the board service of Steve Scotchmer, a distinguished Canadian investor and owner of a large personal stake in the company for decades; and for many years Enstar Group’s /zigman2/quotes/210537315/composite ESGR -0.31% board included Chuck Akre, a distinguished quality shareholder.
Through 2013 when The Washington Post Company sold its flagship newspaper, the company had since 1976 saved almost $1 billion in pension-plan costs thanks to savvy investment advice given by the prominent investors Sandy Gottesman and Bill Ruane. Those mavens were suggested and introduced to the company by one of its earliest and revered QSs: Buffett. Another WaPo veteran is Alan Spoon, of Polaris Partners, also a shareholder-oriented director adding value at such companies as Cable One /zigman2/quotes/207363308/composite CABO -2.33% , Danaher /zigman2/quotes/210555154/composite DHR -0.02% , Fortive /zigman2/quotes/207268286/composite FTV -0.37% and IAC/InterActive /zigman2/quotes/205118493/composite IAC +0.99% .
Each of the 12 companies mentioned so far lead the ranks of those combining shareholder quality, corporate performance and director share ownership, according to research of the Quality Shareholders Initiative at George Washington University at George Washington University. Another 12 follow — all worth a look:
• Abbott Laboratories /zigman2/quotes/203724446/composite ABT +0.90%
• Aptar Group /zigman2/quotes/201205197/composite ATR -0.34%
• Bright Horizons Family Solutions /zigman2/quotes/205199244/composite BFAM +0.53%
• Cincinnati Financial /zigman2/quotes/208697223/composite CINF +0.25%
• Gartner Inc. /zigman2/quotes/205782082/composite IT +0.16%
• General Dynamics /zigman2/quotes/208560027/composite GD -0.59%