Of the many well-worn clichés in the financial world that should be retired, “maximizing shareholder value” is surely toward the top of the list. While private companies aren’t provided the constant, real-time feedback in terms of shareholder value afforded to public companies, ensuring that board, management, and shareholder incentives and preferences in privately held businesses are aligned is one step towards potentially maximizing shareholder value. A shareholder survey can provide feedback to boards and management teams to avoid situations like the one Salesforce is currently facing, which finds itself amidst a potential shareholder-driven board takeover. Since private company managers know precisely who their shareholders are, shouldn’t the characteristics and preferences of these shareholders be considered in the corporate decision-making process? Absent these considerations, any attempts to “maximize shareholder value” are almost always destined to fail. This week’s post outlines a few reasons why boards and management teams should consider a shareholder survey as part of their strategy to keep the incentives of all a company’s stakeholders aligned.
1) A survey will help you learn about your shareholders.
A well-crafted shareholder survey will go beyond mere demographic data (age and family relationships) to uncover the deeper characteristics that owners share and which characteristics distinguish owners from one another. We recently completed a survey for a multi-generational family company; unsurprisingly, one of the findings was that the shareholder base included a number of distinct “clienteles” or groups of shareholders with common needs and risk preferences. What we found surprising was that these “clienteles” were largely not defined by age or family tree branch but rather by the degree to which (a) the shareholder’s household income was concentrated in distributions from company stock and (b) the shareholder’s personal wealth was concentrated in company stock. The boundary lines for the resulting clienteles did not fall where management naturally assumed.
2) A survey will help you gauge shareholder preferences.
The results from a shareholder survey will help directors and managers move away from flimsy abstracts like “maximizing shareholder value” toward concrete objectives that consider tangible shareholder preferences. For example, what are shareholder preferences for near-term liquidity, current distributions, and capital appreciation? Identifying these preferences will enable directors and shareholders to craft a coherent strategy that addresses actual shareholder needs. Conducting a survey does not mean that the board is off-loading its fiduciary responsibility to make these decisions to the shareholders: a survey is not a vote. Rather, it is a systematic means for the board to solicit shareholder preferences as an essential component of decision deliberation.
3) A survey will help educate the shareholders about the strategic decisions facing the company.
While a survey provides information about the shareholders to the company, it also inevitably provides company information to shareholders, creating a beneficial two-way flow of information in the process. In our experience, the survey is most effective if preceded by a brief education session that reviews the types of questions asked in the survey. Shareholders do not need finance degrees to be able to understand the three basic decisions that every company faces: (1) how should we finance operations and growth investments (capital structure), (2) what investments should we be making (capital budgeting), and (3) what form should shareholder returns take (distribution policy). Educated shareholders can provide valuable input to directors and managers and will be more engaged in management’s long-term strategy.
4) A survey will help establish a roadmap for communicating operating results to shareholders.
Public companies are required by law to communicate operating results to the markets on a timely basis. Many public companies invest significant resources in the investor relations function because they recognize the markets must understand not only the bare “what happened” of financial reporting but also the “how and why” provided by a strategy discussion. Oddly, most private companies have no parallel roadmap for communicating results. Private company investor relations are either ignored or consist of reluctantly answering potentially-loaded questions from disgruntled owners (who may, frankly, enjoy being a nuisance). A shareholder survey can be a great jumping-off point for a more structured process to proactively communicate operating results to shareholders. An informed shareholder base that understands not only the “what happened” but also the “how and why” is more likely to take a long-term perspective in evaluating performance.
5) A survey gives a voice to the “un-squeaky” wheels.
A shareholder’s input should not be proportionate to the input volume. While the squeaky wheel often gets the grease, it is prudent for directors and managers to solicit feedback regarding the needs and preferences of quieter shareholders. Asking for input from all shareholders through a systematic survey process helps ensure the directors and managers receive a balanced picture of the shareholder needs and preferences. A confidential survey administered by an independent third party can increase the likelihood of receiving frank (and therefore valuable and decision-useful) responses.
An engaged and informed shareholder base is essential for any private company’s long-term health and success, and a periodic shareholder survey is a great tool for achieving that result. Give one of our senior professionals a call to discuss how a shareholder survey or ongoing investor relations program might benefit your company.