2014 STUDY ON HOW INVESTMENT HORIZON AND EXPECTATIONS OF SHAREHOLDER BASE IMPACT CORPORATE DECISION-MAKING

Transcription

1 STUDY ON HOW INVESTMENT HORIZON AND EXPECTATIONS OF SHAREHOLDER BASE IMPACT CORPORATE DECISION-MAKING

2 TABLE OF CONTENTS Executive Summary and Key Findings... Review of Findings... 3 Demographics... Methodology... About the Authors... About NIRI and the Rock Center...8 Contact Information...8

3 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making Executive Summary and Key Findings Nearly all companies prefer long-term investors but about half of investors have a shorter horizon with significant consequences for companies strategic decisions and stock market performance Nearly all companies describe their ideal shareholder as having a long-term investment horizon but about half of companies shareholder base has a short-or medium-term horizon. As a result, most companies see significant upside to managing their shareholder base and senior leaders spend considerable time meeting with current and prospective investors. More than three-quarters of companies in our survey see significant stock market benefits from managing their shareholder base, says Professor Anne Beyer, Associate Professor of Accounting at the Stanford Graduate School of Business and co-author of the study. Companies believe that if they can identify and attract the right shareholder base, they will be able to increase the price of their stock and decrease its volatility. Companies want long-term shareholders in particular because it allows them to implement their corporate strategy and make long-term investments without the distraction and short-term performance pressures that come from active traders, says Professor David F. Larcker, James Irvin Miller Professor of Accounting and Senior Faculty at the Rock Center for Corporate Governance. We find that the investor relations department can create a real competitive advantage by attracting a shareholder base with the same long-term investment horizon as the company. The study, conducted in partnership with the National Investor Relations Institute (NIRI), surveyed 38 investor relations professionals at North American companies about the investment horizon and expectations of their shareholder base and the impact that these have on corporate decision-making. Companies believe that short-term investors distract from strategic decisions Nearly two-thirds of companies (5%) agree or strongly agree that a company whose shareholder base is dominated by short-term investors cannot focus on strategic decisions because of a focus on short-term results. Just over half (5%) believe that short-term investors lead a company to focus on cost cutting. The majority of companies (5%) agree or strongly agree that a company whose shareholder base is dominated by short-term investors will have reduced market value and/or reduced long-term growth. However, being able to make strategic acquisitions is generally not a concern even if the shareholder base is dominated by investors with short-term investment horizons (only % of companies indicate strategic acquisitions as an area of concern). Investors with short-term horizons pay close attention not only to stock prices in the near term but also the companies short-term performance as reported in their financial statements. If shortterm projects yield lower returns on investment than long-term projects as it is often the case, a shareholder base dominated by short-term investors can become a real challenge for companies, says Professor Larcker. The ideal shareholder base consists of long-term investors still long-term is not that long Companies are most likely to describe their ideal shareholder as having a long-term investment horizon, with the vast majority (9%) listing this quality. Still, a long-term investment horizon doesn t have to be that long. On average, companies estimate the investment horizon of a typical long-term investor to be at least.8 years. By contrast, short-term investors are seen as having an investment horizon of months or less. Not surprisingly, most companies agree or strongly agree that desirable shareholders are not activists (8%). About two-thirds of companies don t want a concentration of ownership and pay attention to the price at which an investor acquired a company s shares. The geographical location in which the shareholder resides plays virtually no role with only % of the companies deeming this an important shareholder characteristic. Companies want to increase ownership of management, employees and pension funds Top management and corporate directors are seen as having the longest investment horizon among major shareholder groups, with 93% and 9% of companies describing their investment horizon as long-term or somewhat long-term, respectively. Among other major shareholder groups, pension funds are seen as having the longest investment horizon.

4 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making Companies don t want hedge fund or private equity investors When asked to describe their ideal shareholder base, companies are most likely to want hedge funds to own a lower percentage of their shares. Currently, companies report that approximately 8% of their shares are held by hedge funds. Ideally, this figure would be 3%, a percent reduction. One reason for the reduction seems to be that hedge fund investors are seen as short-term oriented. 9% of companies believe that hedge funds have a short-term or somewhat short-term investment horizon. Zero companies believe they have a long-term horizon. Also, all companies that reported being partially owned by private equity (PE) want to reduce the ownership of PE investors. In fact, all of these companies want to see the ownership of PE investors go down to zero. Companies believe that their stock price would be higher if they had their ideal shareholder base Most companies (8%) believe that their stock price would trade higher over a two to three year period if they could attract their ideal shareholder base. On average, companies estimate their stock would rise 5% and share price volatility decrease %. These stock-market effects seem to be driven by companies beliefs that a more suitable shareholder base would allow management to implement the company s strategy more effectively, put less pressure on management to focus on short-term results, and provide higher quality feedback on management s decision. Three-quarters of companies (%) agree or strongly agree with at least one of these three factors being a benefit of attracting their ideal shareholder base. Companies see very large, tangible benefits to managing their shareholder base, so there seems to be a real opportunity for some companies to improve corporate decisions and increase their value by paying close attention to who holds their shares, says Professor Beyer. Senior leaders spend considerable time managing their shareholder base Almost all companies (9%) discuss the composition of their shareholder base at the senior executive level. A large majority (5%) discusses this at the board level. On average, the CEO spends. days per quarter managing the company s shareholder base. As might be expected, the CFO spends even more time. days on average. The amount of time senior leaders spend on developing their company s shareholder base shows a real recognition of the importance of shareholder characteristics for a company s performance. Understanding how shareholders affect management decisions is key for any company, says Professor Larcker. Companies rely on road shows and investor conferences fewer companies actively reach out to potential investors When it comes to actively managing their shareholder base, companies most frequently rely on investor conferences, road shows, and meetings of current and potential shareholders with top management or members of the board. About threequarters of the companies use these tools at least on a quarterly basis. Significantly fewer companies actively approach potential shareholders with more than % of companies pursuing this strategy less than twice a year.

5 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making 3 Review of Findings Composition of Shareholder Base. What is the investment horizon of a typical investor (in years)? investor. years or less Cost cutting Extremely important Between.9 and.3 years.8 years or longer Somewhat important 9. How important are the following to a long-term investor? Not at all important Next quarter s earnings Extremely important Somewhat important Not at all important 3 Payout policy (dividends and share repurchases) Extremely important Somewhat important Not at all important 8 Stable/smooth earnings path Extremely important Somewhat important Not at all important 9 5 Active engagement with the company regarding management decisions Extremely important Somewhat important Not at all important 3 Growth opportunities Extremely important Somewhat important Not at all important 95 5 Sustainability of the firm s business model Extremely important Somewhat important Not at all important 98

6 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making 3. What is the typical investment horizon of the following shareholder groups? Retail shares held in street name Active Fund -Growth Retail shares held in personal name Active Fund Value Passive Fund Index Hedge Fund; long/short positions 3 3 8

7 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making 5 Pension Fund Private Activist Individual Pension Fund Unions Activist Fund Pension Fund Public Top Management 3

8 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making Directors of the company. What is the current composition of your company s shareholder base? Retail shares held in street name. Retail shares held in personal name 3. Passive Fund Index.3 Active Fund Growth 3. Employee stock ownership plan (ESOP) Active Fund Value Hedge Fund; long/short positions 8. Pension Fund Private:.8 8 Pension Fund Unions.9 Pension Fund Public. 3 Activist Individual. Activist Fund.3 Top Management 5. Directors of the company 3. Employee stock ownership plan (ESOP). Other 8. Unknown 3. Note: The differences between Q and Q is due to different sample sizes. For Q, the sample size is smaller than for Q. The Actual column on Q only includes the firms that responded to the question of the Ideal shareholder base.

9 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making 5. How would you characterize the investment horizon of your company s current shareholder base?. How frequently do you employ the following strategies in order to actively manage your company s shareholder base? age of shareholder base best described as Road shows Exclusively short-term 9.5 More than quarterly 3. Quarterly 39. Semi-annually. Annually 5 Exclusively long-term 5. Less than annually Unknown. Investor conferences Management of Shareholder Base More than quarterly 5. Is the composition of the shareholder base discussed at the C-level or Board in your company? Board-Level Quarterly Semi-annually 33 Yes 5 Annually No 3 Less than annually Don t know Identify and actively approach shareholders (targeting) C-Level More than quarterly 9 Yes 9 Quarterly 8 No Semi-annually 5 Don t know Annually Less than annually

10 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making 8 Capital Market Day (company specific, no conference) More than quarterly Quarterly Semi-annually Annually Less than annually Enable meetings of current shareholders with board members and/or top management More than quarterly Quarterly Semi-annually Annually Less than annually Enable meetings of prospective shareholders with board members and/or top management More than quarterly Quarterly Semi-annually Annually How much time do the following executives spend actively managing shareholder base (days/quarter)? CEO. days/quarter CFO. days/quarter 9. How much time does the investor relations function spend actively managing the shareholder base (days/quarter)? 3.3 days/quarter Ideal Target/Shareholder Base. Describe your ideal or best possible composition of your company s shareholder base versus your actual shareholder base: Ideal Actual Difference Retail shares held in street name 5.8%.% -.% Retail shares held in personal name 3.% 3.9% -.% Passive Fund - Index 5.3%.%.% Active Fund -Growth 5.% 3.%.% Active Fund - Value.9%.%.3% Hedge Fund; long/short positions 3.% 8.% -5.% Pension Fund Private 3.9%.%.5% Pension Fund Unions.%.%.% Pension Fund Public 3.%.%.% Activist Individual.%.%.% Activist Fund.%.3% -.3% Top Management.%.3%.8% Directors of the company 3.% 3.% -.% Employee stock ownership plan (ESOP) 3.%.%.% Other.% 9.8% -.% Unknown.% 3.5%.% Note: The differences between Q and Q is due to different sample sizes. For Q, the sample size is smaller than for Q. The Actual column on Q only includes the firms that responded to the question of the Ideal shareholder base. Less than annually 3

11 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making 9. To what extent do you agree with the following statements? If the company attracted its ideal/target shareholder base : Management would face less pressure to focus on short-term results Management could more easily pursue value-enhancing strategic M&A transactions 5 3 Management could implement the company s strategy more effectively Shareholders would provide higher quality feedback on management s decision Management could make better investment decisions Board would be able to focus on business rather than appeasing certain shareholders

12 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making. To what extent do you agree with the following statements? The ideal/target shareholder for our company is characterized by: Holding only long positions Non-activist Ownership not over % Invested at a price below current price Ownership not over 5% Invested at a price close to current price

13 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making investment horizon Pursues investment strategy focused on growth investment horizon Pursues investment strategy focused on value investment horizon Has preference for increase in dividend payments 8 8 3

14 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making Votes consistently with management Possesses substantial industry expertise Does not vote Resides in a specific geographical location Do you expect that a change in your shareholder base toward your ideal/target composition would have a positive impact on your share price over the next two to three years? Yes No. Suppose you could change the composition of your shareholder base such that the ownership of an ideal investor as described above increases by % which of the following benefits would you expect to realize over the next two to three years: Increase in share price 5.% increase Decrease in volatility 9.% decrease Increase in trading volume 5.9% increase

15 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making 3 5. Suppose a company in your industry has a shareholder base that is dominated by investors with short-term investment horizons. To what extent to you agree with the following statements? A company with a shareholder base that is dominated by investors with short-term investment horizons Has reduced market value Focuses on cost-cutting 3 3 Has reduced long-term growth Cannot effectively implement the company s strategy Cannot focus on strategic decisions because of the focus on short-term success 58 3 Is restricted from making strategic acquisitions 3 5 5

16 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making Demographic Information What is the annual budget for Investor Relations in your company (excluding annual report costs and listing fees but including staff salaries and benefits as well as allocated overhead)? $88,3 mean $55, median How many people work in Investor Relations in your company? mean median How frequently do you use outside Investor Relation consultants? On an ongoing basis Occasionally Never What is the industrial sector for your company? Business Services Chemicals Commercial Banking Commodities Communications Computer Services Electronics Energy Financial Services (other than commercial banking) 9 What is the revenue for your company? Food and Tobacco <$5 million 5 Industrial and Transportation Equipment $5 million to $ billion 9 Insurance $ billion to $5 billion 39 Lumber and Paper $5 billion to $ billion Other Manufacturing $ billion to $ billion 9 Other Services 8 >$ billion Retail Trade 5

17 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making 5 What is the industrial sector for your company? (continued) How long have you been employed in investor relations? Transportation Less than one year Utilities 3 years Wholesale Trade 3 years 8 Other 3 5 years What is your gender? years Male 5 years Female 39 years 9 3 years What is your age? 3+ years <3 3 to 3 3 What is your title? to 5 3 Vice President 39 5 to Senior Vice President to 9 Executive Vice President > Director 3 Manager 9 Other

18 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making Methodology Results are based on the survey of 38 investor relations professionals conducted between February and March.

19 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making About the Authors Anne Beyer Anne Beyer is an Associate Professor of Accounting at the Stanford Graduate School of Business and former Michelle R. Clayman Faculty Scholar. Anne s research interest is in the area of financial accounting with a focus on corporate disclosure, capital market prices, and corporate governance. Her recent work has examined the properties of analyst and management earnings forecasts as well as investors reaction to different kinds of corporate disclosures. abeyer@stanford.edu David F. Larcker David F. Larcker is James Irvin Miller Professor of Accounting at the Graduate School of Business of Stanford University; director of the Corporate Governance Research Initiative; and senior faculty at the Arthur and Toni Rembe Rock Center for Corporate Governance. His research focuses on executive compensation and corporate governance. Professor Larcker presently serves on the Board of Trustees for Wells Fargo Advantage Funds. He is co-author of the books A Real Look at Real World Corporate Governance and Corporate Governance Matters. Brian Tayan Brian Tayan is a member of the Corporate Governance Research Initiative at the Stanford Graduate School of Business. He has written broadly on the subject of corporate governance, including the boards of directors, succession planning, compensation, financial accounting, and shareholder relations. He is co-author with David Larcker of the books A Real Look at Real World Corporate Governance and Corporate Governance Matters. btayan@stanford.edu Acknowledgements The authors would like to thank Matt D. Brusch, Ariel A. Finno, and Michelle E. Gutman for assistance in the preparation of this study. dlarcker@stanford.edu

20 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making 8 About NIRI and the Rock Center About the National Investor Relations Institute Founded in 99, the National Investor Relations Institute (NIRI) is the professional association of corporate officers and investor relations consultants responsible for communication among corporate management, shareholders, securities analysts and other financial community constituents. The largest professional investor relations association in the world, NIRI s more than 3,3 members represent over, publicly held companies and $9 trillion in stock market capitalization. About The Rock Center for Corporate Governance The Arthur and Toni Rembe Rock Center for Corporate Governance is a joint initiative of Stanford Law School and the Graduate School of Business at Stanford University. The Center was created to advance the understanding and practice of corporate governance in a cross-disciplinary environment where leading academics, business leaders, policy makers, practitioners and regulators can meet and work together. Contact Information For more information on this report, please contact: Katie Pandes Assistant Communications Director Stanford Graduate School of Business Knight Management Center Stanford University 55 Knight Way Stanford, CA Phone: kpandes@stanford.edu Ariel A. Finno Director-Research National Investor Relations Institute 5 Reinekers Lane Alexandria, VA 3 Phone: afinno@niri.org National Investor Relations Institute and Stanford University Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making

21