Facebook director Peter Thiel drew enormous attention last month when he sold the majority of his Facebook stock for nearly $400 million. Most commentators focused on whether Thiel's sale as an insider indicated that Facebook may not be a good investment.
But there is another issue raised by Thiel's stock sale, and any significant future sale of stock by other Facebook directors as well.
Put simply, academic studies suggest that directors are less effective the fewer shares they own in the company. This is because directors with stock ownership in a company may be especially focused on its long-term, strategic growth.
A 2010 review of corporate governance studies noted that greater stock ownership by directors is one of the few governance characteristics associated with better company performance.
A particular problem for an innovative company like Facebook is the potentially negative relationship between long-term, innovation activities and director stock ownership. The few studies that look at the issue find evidence that companies with lower director stock ownership engage in less research and development. These studies are briefy summarized on pages 869-870 of this 2007 article.
None of the foregoing strongly suggests that Thiel will actually be less effective at advising Facebook now that he has dumped most of his stock in the company. The studies referred to above are very limited in providing solid predictions of individual behavior or company performance. And Facebook's culture and Mark Zuckerberg's own repeated committment to the long-term may also mitigate any negative impact of Thiel's reduced stock holdings.
Nonetheless, it is still worth contemplating whether a Facebook board with less skin-in-the-game may also be less committed to long-term activities that produce innovation.
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