What is the skin in the game?

Skin in the game is a phrase made popular by a reputable investor Warren Buffett referring to a situation in which senior insiders use their own money to buy shares of the company they run. The saying is especially common in business, finance and gambling and is also used in politics.

Understanding the skin in the game

In business and finance, the term skin in the game is used to refer to the owners or directors have a significant stake in an investment vehicle, such as shares of a company, in which outside investors are solicited to invest. In this sentence, “skin” is a figure of speech for the person or the money involved, and “game” is the metaphor for the actions on the playing field under discussion.

It is not uncommon for an executive to receive shares as compensation or exercise stock options buy a stock at a discount. What is less common is that a leader risks his own money in the company in which he works. , and this is seen as a positive sign by outside investors.

If the principals or owners have also invested their own money in the investment vehicle, then potential and existing investors will translate this decision as a vote of confidence. Skin in the game – or insider ownership – also signals to investors that the company will likely do its best to generate returns for its investors.

The idea behind putting their skin in the game is to ensure that businesses are run by like-minded people who share a stake in the business. Leaders can talk all they want, but the best vote of confidence is putting their own money on the line, just like outside investors.

In-game skin limitations

However, some limitations exist when owners and senior executives are required to invest their own money in a security. Many banks and other financial institutions prohibit employees from having a “skin” where client capital is managed. The restriction addresses the issue of forward race, that is, when a manager engages in a transaction (with inside or non-public information) just before an event or an announcement to obtain an economic advantage.

There are also restrictions on mixed funds, which is the pooling of resources or the blending of private and corporate resources into corporate stocks or bonds. In some cases, leaders must remain objective in their decision-making and are prohibited from investing in the company they run.

In-game skin disclosure requirements

The Security and Trade Commission (SEC) requires funds to annually disclose how much money each portfolio manager invested in the fund. Using this public information, proponents argue that finding fund managers who put their money where they say they can be a reliable way to identify fund managers who could beat the market in the long run. Proponents of the Skin in the Game argue that committing capital is the most important way to align the interests of investors and managers.

The SEC also requires companies to report ownership or insider trading in a company’s securities. The reports are required because transactions made by officers, directors and officers can affect the price of the company’s shares. There are different types of forms that executives must file with the SEC. Investors can access and use these insider ownership reports to make a more informed decision about whether or not to invest in the business.

Real in-game skin example

If investors want to see a CEO with good skin in the game with their business, there are few better examples than Elon musk. Elon Musk is the CEO of Tesla Inc. Below is a part of the SEC file showing the number of Tesla shares held by its CEO. Musk owned more than 227 million Tesla shares in his last annex 13G repository by December 31, 2021.