Does The Shareholder Composition Of A Company Matter?

Does The Shareholder Composition Of A Company Matter?

We did an article on this but for those who missed interesting topic in corp governance, see more below.

Does The Shareholder Composition Of A Company Really Matter?

By Anne Beyer, David F. Larcker, and Brian Tayan

July 31, 2014

The Influence Of Shareholders

Shareholders are not a homogenous group. They include a diverse mix of institutional and retail investors that differ in terms of investment horizon (long-term versus short-term), objectives (purely economic versus social objectives), level of activity (active versus passive), portfolio concentration, and size.

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Most corporations dedicate significant time and attention to managing their shareholder base. A recent survey by the National Investor Relations Institute (NIRI) and the Rock Center for Corporate Governance at Stanford University finds that 91 percent of companies discuss shareholder composition at the senior-executive level; 75 percent discuss this at the board level. CEOs spend 4.2 days per quarter managing their shareholder base, and CFOs 6.4 days—considerable figures given the managerial responsibilities of senior leaders. Most companies (80 percent) believe that their stock would trade at a higher price if they could attract their “ideal” shareholder base. On average, companies estimate that their stock would rise 15 percent and share price volatility decrease 20 percent over a two to three year period if they had the right shareholders.

Furthermore, companies overwhelmingly prefer “long-term shareholders” to “short-term shareholders.” Ninety-two percent of companies in the NIRI/Rock Center study describe their ideal shareholder as having a “long-term investment horizon”-the most highly rated among all attributes surveyed. They describe long-term shareholders as having an investment horizon of at least 2.8 years. Respondents believe that investors with a short-term perspective distract from strategic decision making (65 percent) and focus on cost reduction (51 percent).

A majority (57 percent) believes that a company whose shareholder base is dominated by short-term investors will have reduced market growth and/or reduced long-term growth (see Exhibit 1). Some prominent investor groups, too, share these concerns (see Exhibit 2).

shareholder composition


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