Stock trading on the New York Curb Association market, with brokers and clients signaling from street to offices, 1916 (Source: Wikimedia Commons)
Ideas for Leaders #447

The Impact of Ideal Vs Problematic Shareholders

This is one of our free-to-access content pieces. To gain access to all Ideas for Leaders content please Log In Here or if you are not already a Subscriber then Subscribe Here.

Key Concept

In an ideal world, companies would spend significant time managing their shareholder base, striving to attract the ideal shareholder: a shareholder with a long-term investment horizon who will allow the company to make long-term investments and not push for short-term results. Shareholders with short-term investment horizons drag down share prices or increase their volatility by focusing on short-term results.

Idea Summary

Companies want shareholders who share their long-term investment horizon, according to a survey of 138 North American investor relations professionals. More than 90% of the companies surveyed describe their ideal shareholder as one with a long-term perspective. The reason: by giving companies the freedom to make strategic decisions and long-term investments, long term-focused shareholders help companies build their competitive advantage.

When short-term investors dominate the shareholder base, on the other hand, nearly two thirds of the companies believe executives cannot make strategic decisions because they are forced to focus on short-term results. Executives are well aware that their investors are watching the stock price daily — and watching the performance results quarterly. The impact of this short-termism pressure is significant: a majority of companies believe that investors with a short-term perspective reduce both the market value as well as the long-term growth of the company.

When asking for a long-term investment horizon, companies aren’t necessarily asking investors to park their money for 10 or 20 years. On average, companies estimate that a long-term investor has an investment horizon of 2.8 years (which compares to 7 months or less for short-term investors).

The ideal shareholder base, as defined by the companies, reflects their preference for the long-term investment horizon. They would prefer not to have activist shareholders nor a concentration of ownership. They would also like to reduce the percentage of hedge funds and private equity investors among their investor base, both viewed as too focused on the short-term. In contrast, companies would like to increase the ownership of management and employees and of pension funds (seen as having the longest investment horizon among major shareholder groups).

Business Application

On average, companies believe their stock would rise 15% and share price volatility would drop 20% if they had their ideal shareholder base, for three reasons:

  1. They would be able to implement their strategy more effectively.
  2. They would be under less pressure to focus on short-term results.
  3. They would receive high quality feedback from shareholders on their decisions.

Senior executives spend a significant amount of time managing their shareholder base, often through investor conferences and road shows. A smaller number of companies reach out directly to meet current and potential shareholders. Given the impact that the ideal shareholder base can have on results, more companies would be better served by understanding how shareholders influence results — and how effective face-to-face meetings can be major step in attracting the ideal shareholder base. Executives should also strive to increase the participation of managers and employees, as well as pension funds.

Real Time Analytics