A company whose shareholder base is dominated by short-term investors can’t focus on strategic decisions, according to a new study undertaken by Stanford Business.
The study was conducted by Stanford Business in partnership with the National Investor Relations Institute by surveying 138 investor relations professionals at North American companies to ascertain the impact that shareholder base can have on corporate decision making.
Companies prefer long-term investors
According to the study, companies are most likely to describe their ideal shareholder as having a ‘long-term investment horizon’. On average, companies anticipate the investment horizon of a typical long-term investor to be at least 2.8 years. By contrast, short-term investors are seen as having an investment horizon of 7 months or less.
As revealed by the study, the following graph captures the investment horizon of companies’ current shareholder base:
The study highlights the following as the ideal vs actual composition of shareholder base. As shown by the following graph, currently companies report that roughly 8% of their shares are held by hedge funds. However, ideally this figure would be just 3%, showing a 60% reduction. The study thus highlights that companies don’t prefer hedge fund or private equity investors:
According to the study, companies prefer long-term shareholders because long-term investors facilitate the implementation of their corporate strategy and allow management to make long-term investments without the distraction of worries about short-term performance. Moreover, nearly two-thirds of companies agree or strongly agree that a company whose shareholder base is dominated by short-term investors can’t focus on strategic decisions because of the focus on short-term results.
The following graph highlights the benefits that would accrue to a company that has attracted its ideal/target shareholder base:
Short-term investors: Ideal shareholder base would boost stock price
The study highlights that over half of the respondents believe that short-term investors lead a company to focus on cost cutting. The majority of companies agree or strongly agree that a company whose shareholder base is dominated by short-term investors will have a reduced market value and/or reduced long-term growth:
The study also points out that most companies believe that their stock price would trade higher over a two to three year period if they could attract their ideal shareholder base.
According to the Stanford Business study, senior leaders spend considerable time managing their shareholder base. As highlighted in the following graph, on average the CEO spends 4.2 days per quarter managing the company’s shareholder base, while the CFO spends 6.4 days on average:
The study also highlights that about three-quarters of the companies use investor conferences or road shows at least on a quarterly basis. However, relatively few companies actively approach potential shareholders.