Corporations are convinced that the composition of their shareholders has a significant, if difficult to quantify, impact on both the company’s and the stock price’s long term-performance. A survey conducted by the National Investor Relations Institute (NIRI) and Stanford University found that 91 percent of public companies discuss shareholder composition at the executive level, and 75 percent at the board level, while CEOs spend an incredible 4.2 days per quarter ‘managing’ their shareholder base. But for all this effort, Stanford University professors Anne Beyer and David Larcker and researcher Brian Tayan don’t see any proof that shareholder composition even matters.
Companies have a long wish list when it comes to shareholder composition: non-activist; votes with the board or doesn’t vote; ownership below 10%; basically a lot of synonyms for ‘let’s us run the company’. But the most important characteristic is a long-term investment horizon, preferred by 92% of respondents. And they weren’t even looking for a particularly long horizon either, just 2.8 years or more. Reading between the lines, corporate boards just want investors who are looking beyond the next few quarters.
If they had the right mix of investors, companies say that their share prices would go up by 15% on average and that volatility would go down by 20%.
“There is little evidence that demonstrates that the composition of a company’s shareholder base directly impacts corporate decision making, operating performance, or value creation,” write Beyer, Larcker, and Tayan.
They find that the long-term impact of activist campaigns on corporate performance is mixed (there’s more evidence of a short-term impact). Activist hedge funds have more success than pension funds at getting what they want, but don’t have a much better record driving long-term performance. A high percentage of short-term investors increases volatility, which seems pretty straightforward, but doesn’t translate into higher or lower prices.
According to Beyer, Larcker, and Tayan corporate boards weren’t the only ones to overestimate the importance of shareholder composition, as blockholders (shareholders that own 5% or more in a company) pay an average 16% premium over market prices to put their position together. Presumably they think that having more control over the company will help them, but that doesn’t turn out to be true on average.