Fool co-founder Tom Gardner wrote that he made his greatest investments by focusing on one metric: insider ownership. Is there anything that motivates an executive more than increasing his or her own wealth? Well, perhaps family loyalty.
Old Dominion's old story
When a company is both family-run and has high insider ownership, like Old Dominion Freight Line (Nasdaq: ODFL ) , it certainly provides more incentive for managers to return value to shareholders. Earl and Lillian Congdon started Old Dominion Freight with one truck and one route back in 1934. In the 1950s, their two sons joined the company, and later the grandsons, one of whom is now CEO. During this time, the company grew from one truck to more than 5,000 tractors and more than 20,000 trailers. And the stock performed brilliantly the past 10 years:
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Looking at insider ownership (easily found on the 14A filing), Old Dominion also trumps competitors:
|
Company
|
Insider ownership
|
| Old Dominion |
17.4% (18.4% total owned by Congdons)* |
| J.B. Hunt (Nasdaq: JBHT ) |
6.6% |
| Arkansas Best (Nasdaq: ABFS ) |
5.5% |
| Con-way (NYSE: CNW ) |
3.0% |
Source: Companies most recent 14A SEC filings.*Additional shares held in various trusts and custodial accounts.
It's more than money
Money is obviously a great extrinsic motivator for executives -- the better one performs, the larger the money pile on which to sleep. This is one reason to analyze insider ownership. But what if you added an intrinsic motivator along with money?
Working tightly with family members motivates through family pride, which cannot be bought. Parents want to leave a legacy for their children, sons and daughters want to earn their parents' respect, and siblings want to outdo each other. This motivation, channeled correctly into the business, creates passionate executives who can outperform competitors in the name of family pride.
The other families
This motivation is extremely difficult for competitors to replicate. At least one family member related to the main founder sits on the board at Arkansas Best and J.B. Hunt, but neither of them achieves the tight-knit family that actively runs the company like Old Dominion, and these companies have not matched the returns of Old Dominion over the last decade. At a Congdon family dinner, the question "How was work?" almost becomes a board meeting, whereas other companies' executives can clock out at the end of the workday.
Family can be great...
But it also can be good just to see family during holidays. As much as family passion can fuel growth, it can fuel destruction. For example, if families pass down control from one generation to the next with little input from outsiders, they might fail to adapt to market changes, like the Sulzberger family running New York Times Co. (NYSE: NYT ) . These companies are obviously in different industries, but over the past 10 years, a share of New York Times lost 78% of its value. Fortunately, investing in the future seems to be a Congdon family value, with CEO David Congdon himself helping design the company's IT network.
It's also difficult to transition businesses to younger family members. In fact, about 40% of family businesses are passed on to the next generation, but only 13% to the third generation. Old Dominion has already beaten the odds, currently in its third generation of family ownership. Investors may want to hope that trend will continue into the future. Make sure to add the stock to My Watchlist to keep track of how the grandchildren handle the reins.
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