Writing for Inside Investor Relations, Elizabeth Judd‘s article, The Perfect Shareholder Base, demonstrates a more sophisticated approach. Still, I think directors will find Douglas Y. Park’s advice, Shareholder Activism: A Thoughtful Approach for Effective Engagement a better approach.Back in 1996 I reviewed Michael Useem’s Investor Capitalism: How Money Managers Are Changing the Face of Corporate America, which observed the growth of indexing prevented the ready selling of underperforming companies. Investors are now more likely to “speak out than to cash out.”
Since then, the movement to indexing or modified indexing has only accelerated. Whereas managerial capitalism tolerated a host of company objectives, Useem argued that under investor capitalism enhancing shareholder value became paramount. Yet, Useem noted managers weren’t taking shareowner activism lying down, advising:
Shareholders can replace directors, directors can replace managers, and managers in turn can replace shareholders.
Institutional investors, such as CalPERS were putting out focus lists but corporations had begun to use their investor relations staff to hold ”shareholder mix” campaigns. Such campaigns usually sought to increase the holdings of employees and individual investors, since they are most likely to vote with current management. Although such holdings are generally individually modest, they can be collectively significant.
Useem’s insights were followed up by Carolyn Kay Brancato’s Institutional Investors and Corporate Governance: Best Practices for Increasing Corporate Value. As I said in my review:
Viewing your stock as you would the products you sell, and trying to woo shareholders as you would potential customers offers the ultimate offers “win-win” situation, but only if the shareholders so selected continue as passive consumers.
Kay Brancato’s strategy largely assumes shareholders add no value other than their strictly financial investments. That’s like thinking the only value citizens add is paying taxes.
The Perfect Shareholder Base takes a more nuanced approach. Judd cites a Thomson Reuters report where James Tickner, head of global investor targeting, and Chris Collett, global head of advisory services, analyzed the shareholder bases of the 50 best-performing companies within the S&P 500 over the past five years. As they predicted, the top achievers had higher percentages of growth investors and fewer value investors than the typical S&P 500 company. Yet, I think there is an obvious correlation and causality in both cases is likely to run only one way.
A more interesting finding was that the best-performing companies actually have a slightly higher proportion of short-term investors. Perhaps those with fewer indexed funds need to perform or they risk a sell-off.
Lucas Scheer, president of LS Global Advisory Group points out that “retail investors, especially foreign retail investors, can make more people in their regions aware of your company.” Simon Courtenay, managing director of London-based Broker Profile, adds that unlike in the US, where retail investors tend to make their own investment decisions, in the UK, private client fund managers control more than 80 percent of the retail market, so forming a relationship with private client brokers in the UK is easier than reaching out directly to retail and still yields very long investment horizons.
Julian Cassells of Alpha Advisor Associates suggests that a savvy IRO at a company with a good governance track record might want to target SRI funds. Brian Matt, director of data strategy and analytics for Ipreo in New York, argues for market depth:
What it all boils down to is that an extremely concentrated shareholder base is at risk from a move from one investor or a very small number of investors. A more diverse shareholder base is a bit more immune to that impact.
While mix campaigns may have value, IROs and directors might find paying close attention to their existing shareowners more a more cost-effective approach, especially potential activists. Douglas Y. Park says to focus on three key areas (Shareholder Activism: A Thoughtful Approach for Effective Engagement):
- Executive Compensation. The main areas of focus are the connection between pay and performance, guaranteed bonuses, and golden parachutes. Activists want to understand the reasoning behind compensation policies. They want to see that the policies align management’s incentives with the pursuit of shareholder returns.
- Corporate Governance. Common topics of concern are director independence and board composition, majority voting and staggered boards, and sustainability and social issues.
- Strategy. As with executive compensation and corporate governance, shareholders want to understand the underlying basis of the company’s business model and strategy.
Companies see shareholder resolutions as a more effective tool than activists do. At the same time, activists see dialogue and negotiations as a more effective tool than companies do. According to Park,
The board should discuss when and how to engage with activists. A committee should be appointed to lead the communications. The governance committee is often a good candidate. The appointed committee and the CEO should catalog the concerns, prioritize them by significance and ripeness, and determine whether another committee should lead or support the communications…
Finally, an effective approach must incorporate legal considerations. For example, the board must take care to communicate within the parameters of Regulation FD. Regulation FD prohibits the board from giving material non-public information to only some shareholders. If material non-public information is disclosed to an activist, that information must be disclosed to all shareholders. When in doubt, seek the guidance of legal counsel. Similarly, the board should keep in mind its obligation to fulfill its fiduciary duties to all shareholders, not just the activists.
Sometimes the best way to attract the right mix of shareowners is to engage in dialogue, treating them like they bring not only money to the table but brains and ideas worthy of consideration. Deciding the right emphasis at each company may not be easy.