Monday, July 2, 2012


Mark Weldon is the former CEO of NZX, the New Zealand stock exchange (which itself, is listed on the NZX as “NZX”.

In today’s stuff, there’s an article about his big sell down of his NZX shares which he accumulated while CEO of NZX. He's bought a vineyard.

The article makes him seem to be pretty confused, but I expect he’s skirting around the truth to be polite. He says:

''It is just not at all sensible to have all your money invested in one stock alone. If you work at a place, it is a different story, but once you have left an organisation to have all your eggs in one basket is just not a strategy anyone would advise''
The face of an undiversified man

In fact, if you work at a place, it’s an even worse strategy to have all your eggs in one basket.

One way to see this is to think of your assets as two things - your human capital (your skills, connections, current employment) and your financial capital (money, shares, house, etc). When you are heavily invested with both your human and financial capital in the same basket, you are incredibly undiversified. That's what Weldon was when he was at NZX.

The easiest intuition to think about is those Enron employees who had invested their pensions in Enron shares. When Enron was found out to be the fraud that it was, those employees lost their jobs and their savings. Had they diversified away from Enron with their financial capital, they would have been much better off, and exposed to much less risk. So there’s a reason to think that the story is not different when you work at a place. In fact it’s a scarier story.

From a shareholder’s perspective, often we’d like the CEO to own a lot of stock of the company – to some extent it aligns the CEO’s interests with ours (both parties want the price to go up, and hopefully the CEO can actually do something about it). But from the CEO’s perspective it’s very risky. Sometimes the risk can pay off, and it certainly makes sense if, as the CEO, you believe you can have a meaningful impact on the business, and that impact will increase the share price more than the increase in other stocks who presumably have CEOs who are as confident as you in their own abilities.

In other words, if as a CEO you can answer the question “am I an above average CEO?” in the affirmative, then maybe it’s worth trading off some diversification for this outsized performance. Of course, almost every CEO, by their nature, will think that they are above average, so it’s probably not a bad strategy to just ignore your subjective belief, assume that you are overconfident in your belief of your above averageness, and do not invest any financial capital investment in the firm you are CEO of (and if you did the numbers, depending on the amounts of your physical and financial capital it might even make sense to go short the shares (but then you’d probably lose your job so....)).

In Weldon’s case, the share price of the NZX performed very well over his tenure, so there’s (at least) weak empirical evidence that he is an above average CEO. And you’ve got to expect that the board who appoints you as CEO know how many shares you own and like the fact that you’ve doubled down on the company – you are incentivised.

So why is Weldon selling? The real answer must surely be a combination of two reasons:
· He needs the money for his vineyard, and
· He has no ability to influence the share price by now, and suspects that the new CEO will not be as good as him (or at least the information asymmetry of him knowing his own abilities intimately but not knowing the new CEO’s abilities as intimately brings enough risk into the situation that he should sell down).

The first reason is almost certainly dominant, but the second reason is more fun to think about.

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