
Skin in the Game
Table of Contents What Is Skin in the Game? Understanding Skin in the Game Limitations of Skin in the Game Disclosure Requirements Real-World Example Skin in the game is a phrase made popular by renowned investor Warren Buffett referring to a situation in which high-ranking insiders use their own money to buy stock in the company they are running. In business and financing, the term skin in the game is used to refer to owners or principals having a significant stake in an investment vehicle, such as shares of a company, in which outside investors are solicited to invest. When an executive puts skin in the game, it is seen as a sign of good faith or a show of confidence in the future of the company, and it is seen as a positive sign by outside investors. Skin in the game — or insider ownership — also conveys to investors that the company will likely put its best foot forward to generate returns for its investors.

What Is Skin in the Game?
Skin in the game is a phrase made popular by renowned investor Warren Buffett referring to a situation in which high-ranking insiders use their own money to buy stock in the company they are running. The saying is particularly common in business, finance, and gambling and is also used in politics.



Understanding Skin in the Game
In business and financing, the term skin in the game is used to refer to owners or principals having a significant stake in an investment vehicle, such as shares of a company, in which outside investors are solicited to invest. In this phrase, "skin" is a figure of speech for the person or money involved, and "game" is the metaphor for actions on the field of play under discussion.
It is not unheard of for an executive to receive stock as compensation or to exercise stock options to buy a stock at a discount. What is less common is for an executive to risk their own money in the company that they work in. When an executive puts skin in the game, it is seen as a sign of good faith or a show of confidence in the future of the company, and it is seen as a positive sign by outside investors.
If principals or owners have also invested their own money in the investment vehicle, then prospective and existing investors will translate this move as a vote of confidence. Skin in the game — or insider ownership — also conveys to investors that the company will likely put its best foot forward to generate returns for its investors.
The idea behind executives putting their skin in the game is to ensure that corporations are managed by like-minded individuals who share a stake in the company. Executives can talk all they want, but the best vote of confidence is putting one's own money on the line just like outside investors.
Limitations of Skin in the Game
However, some limitations exist when owners and senior management executives are asked to invest their own money in a security. Many banks and other financial institutions bar employees from having any "skin" where client capital is managed. The restriction addresses the issue of front running, which is when an executive enters a trade — with inside or non-public information — just before an event or announcement to gain an economic advantage.
There are also restrictions on commingled funds, which is the pooling of resources or the mixing of both private funds and corporate resources into the company's stock or bonds. There are some instances when the executives must remain objective in their decision-making and are barred from investing in the company's they manage.
Disclosure Requirements for Skin in the Game
The Securities and Exchange Commission (SEC) requires that funds annually disclose how much money each portfolio manager has invested in the fund. Using this public information, proponents argue that finding fund managers who put their money where their mouths are can be a reliable way to identify fund managers who could be expected to beat the market over the long run. Proponents of skin in the game argue that capital commitment is the single most important way to align the interests of investors and managers.
The SEC also requires companies to report on insider ownership or trades of a company's securities. The reports are required because trades by executives, directors, and officers can impact the price of the company's stock. There are various types of forms that the executives must file with the SEC. Investors can access and use these insider ownership reports to make a more informed decision as to whether to invest or not invest in the company.
Real-World Example of Skin in the Game
If investors want to see a CEO that has skin in the game with their company, there are few better examples than Elon Musk. Elon Musk is the chief executive officer (CEO) of Tesla Inc. Below is a portion of the SEC filing showing the number of Tesla shares owned by its CEO. Musk owned more than 227 million shares of Tesla per his latest schedule 13G filing for Dec. 31, 2021.
Related terms:
Commingled Fund
Commingled funds mix assets from several accounts, which affords them lower costs and other economies of scale benefits. read more
Front-Running
Front-running is trading stocks or any asset based on insider knowledge of a future transaction that will affect its price. It is illegal in most cases. read more
Insider Buying
Insider buying is the legal purchase of shares by a senior executive or director of a company. read more
Insider Trading Sanctions Act of 1984
The Insider Trading Sanctions Act of 1984 is a piece of federal legislation that allows the SEC to seek civil penalties for insider trading. read more
Penny Stock Reform Act
The penny stock reform act sought to clamp down on fraud in non-exchange-listed stocks priced below $5 that generally trade in the over-the-counter market. read more
Portfolio Manager
A portfolio manager is responsible for investing a fund's assets, implementing its investment strategy, and managing the day-to-day portfolio trading. read more
Principal
A principal is money lent to a borrower or put into an investment. It can also refer to a private company’s owner or a one of a deal’s chief participants. read more
Schedule 13G
Schedule 13G is an SEC form that is used to report any stock ownership which exceeds 5% of a company's total stock. read more
Seasoned Security
A seasoned security is one that has been publicly traded in the secondary market long enough that there won't be much in the way of short-term effects as a result of its IPO. read more
Securities and Exchange Commission (SEC)
The Securities and Exchange Commission (SEC) is a U.S. government agency created by Congress to regulate the securities markets and protect investors. read more