In reality, Twitter’s board share ownership is very similar to other companies.

Excluding Dorsey, independent Twitter directors held a median ownership stake of 0.003%. For comparison, we looked at equity ownership of independent directors of companies listed in the S&P 500 stock index in 2021. We found the median stake was less than 0.01%, and all but a handful of directors held less than 1% of the company’s stock. Median ownership at Musk’s company Tesla is similarly minuscule, at 0.23%.

Whether this makes a difference to a company’s success is hard to assess because research on the topic is rather sparse, in large part because board members have so little equity.

Mixed research

Academic researchers on effective corporate governance in the 1970s argued that outside directors should avoid owning many shares in the companies they oversee to maintain objectivity. More recently, management scholars have suggested that higher stakes could provide a way to motivate directors to monitor management and make decisions more in line with shareholder interests.

But other work that examined multiple studies shows the impact of director stock ownership is mixed at best, with some studies suggesting higher stakes potentially lead to negative outcomes, such as excessive executive and director compensation. Some researchers have found that boards with larger ownership stakes can improve a company’s operational performance and better align outside directors with the interests of shareholders.

Since the passage of the Sarbanes-Oxley Act of 2002 after massive accounting scandals at Enron, WorldCom, and elsewhere, corporate governance issues such as board oversight have become increasingly important. This led to a number of changes intended to align the interests of managers and those of shareholders, including a focus on board independence and adjusting executive compensation.

Although our research shows boards are limited in their ability to monitor management, they’re still better than nothing.

In his letter to shareholders announcing his bid, Musk vowed to “unlock” Twitter’s potential as a private company, without a public board. We may soon see if he’s right.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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