Stop Listening To Your Shareholders
- Ryan Bunn
- 4 hours ago
- 3 min read
Shareholders own the business — But shareholder incentives vary — Businesses must manage for the long-term, not short-term shareholder returns.
STOP LISTENING TO YOUR SHAREHOLDERS
Shareholders own the business. As owners seeking a satisfactory return on investment, shareholders should support management in growing the value of the enterprise. Under these conditions, management teams can be viewed as serving “at the pleasure of” the shareholders, but with generally aligned interests.
In reality, this incentive alignment is deteriorating. Today, the ownership base of publicly listed companies is no longer a single, aligned voice. It is a rotating crowd of index funds, pod shops, retail accounts, and a shrinking core of active managers, each with different time horizons and return targets.
Treating every owner as an equal participant is a recipe for disaster. Management teams should stop listening to all of their shareholders and instead prioritize shareholders that are truly aligned with the employees, management, customers, and other long-term owners of the business.
Does Anyone Know What They Want?
In general, people do not know what they want. We all desire fulfillment, purpose, and self-actualization, but we constantly choose to skip workouts, eat hamburgers, and stay up late.
This isn't conjecture. When analyzing purchasing behavior, asking people what they would purchase predicts actual behavior with only 34% accuracy. Ask people about healthy choices and nearly half will say they'll order the salad, then order the fries.1
If people cannot predict what they will have for lunch, it is fair to question whether shareholders know what they want from a business.
Incentives, Always Incentives
The fix, when evaluating consumer preferences, is to provide strong incentives. Confronting individuals with realized outcomes that involve actual spending improves their ability to predict their own actions.2
So what are shareholders' incentives? On the surface, everyone wants the same thing: a higher stock price. But no two shareholders have the same preference.
A higher stock price by when? At what risk? Through what path: reinvestment, buybacks, a dividend, a sale? Shareholder desires depend on fund structure, fee model, cost basis, and exit timeline. The stated preference for higher returns is unanimous, but the revealed preferences show conflict.
The Vocal Minority
Worse, the shareholders management hears from are not a representative sample. The frenetic pace of investor relations, including earnings calls, non-deal roadshows, conferences, and individual shareholder calls, pushes the focus to quarterly results.
The loudest voices are those that have the most to gain, or lose, over the shortest time period. Shareholders content with quietly compounding see little reason to bother management about quarterly business fluctuations. Instead, the short-term investor is constantly in front of management.
Deep value investors are a good example. Taking large stakes when share prices are low, they are generally vocal about their preferences, and their preferences deserve scrutiny. An investor whose cost basis sits far below liquidation value may genuinely prefer liquidation for an outsized, near-certain return. But this path is the end of the road for employees, management, and shareholders.
Muddled Strategies
The result, if management cannot ignore the majority of its shareholders, is muddled thinking. Businesses that do some M&A, occasionally buy back shares, sometimes pay down debt, and offer an insignificant dividend are letting the whims of a fluctuating shareholder base dictate their strategy.
Management is often guilty of reshaping capital allocation based on whoever sits at the top of the register at any given moment. Given the structure of today's markets and high management turnover, it is understandable. It also destroys value for the true long-term owners of the business.
The Fix
Management and boards should take advice only from shareholders whose incentives they understand, and only from those operating out of fund structures that allow shares to be safely held for the long term. Even then, skepticism is warranted. As our deep value example shows, a low cost basis can change the mindset of even self-professed long-term investors.
It is common practice for investor relations departments to entertain questions from every shareholder. Maybe that practice should change. Every incremental buyer moves a stock price up, but chasing buyers among short-term investors and pod shops is a poor trade. Will those shareholders still be there if a crisis arrives?
Answering that requires knowing who actually sits behind the shares. Long-term shareholders, building real relationships with management, are increasingly rare. Management teams must understand that not all shareholders are equal and value their long-term partners.
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