Business management

Keeping the shareholders happy

Keeping your business backers happy can mean the difference between pursuing a strategy for growth, or languishing at an impasse. Communication and a sense of impact are key.

There can be significant variation in the extent to which outside investors wish to influence the operations of the companies they have funded. But the general trend is towards greater engagement with the strategic direction of investee businesses, says Carla Stent, an experienced investor and former board member of both Virgin and Barclays.

“Because there is such little return on investment elsewhere, people are taking equity investment a lot more seriously and starting to want a lot more updates,” Stent says. “In the start-ups I am investing in, for example, people are scrutinising monthly figures in a way that angel investors simply weren’t doing 10 years ago.”

Stent adds that changes in the pension system, which mean that workers are more dependent on stockmarket performance for their retirement income, has created a “greater degree of focus” as far as institutional investors are concerned. “With pensions, people are more in control of their own destiny – so they are taking their investments a lot more seriously.”

More to offer

Senior management should recognise that major shareholders have more to offer than just capital, says Luke Hildyard, policy lead for stewardship and corporate governance at the Pensions and Lifetime Savings Association.

“The big asset managers and pension funds will have highly qualified staff working on investment issues and stewardship issues,” he explains. “They will be invested in a wide range of companies so will have perspectives that aren’t always apparent to the board or the executives of the company – and this expertise can certainly add value to the investee company.”

Engagement with shareholders is important for a number of reasons. Hildyard says: “A company that keeps shareholders informed about high-level developments, both positive and negative, is likely to be viewed positively by the markets – and that’s likely to have beneficial effects on their share price and investment prospects.”

In addition, companies that ensure shareholders’ goals are aligned with their own strategic direction from the off are much less likely to face resistance when it comes to making major decisions, says Jean Pousson, a management consultant at Board Evaluation and course leader at the Institute of Directors. “You see this issue on Dragons’ Den – they are so happy to get capital that they don’t engage in the kind of discussions that they should, and they don’t align their strategic intentions with the investor’s.”

Pousson adds: “This happens a lot with private equity, where the equity provider takes a majority shareholding with the intention of being out within five years – very often the strategy of the other business or the entrepreneur is not aligned with that. But if you’re giving over equity control, guess who wins that discussion?

“When a request for capital is not supported by a very strong understanding of the strategic intentions of the management team, you get misalignment and then you get conflict.”

Pousson gives the example of easyJet, where founder Sir Stelios Haji-Ioannou and his family own a significant chunk of the airline’s shares. “This is the classic case, where Stelios and his family want a bigger dividend payment and maybe some capital back, whereas the board have very high ambitions. As a consequence, issues of growth and strategy and conflict have been played out publicly.”

Unwanted help

As well as acting as a drain on management’s time, issues like this can affect a company’s reputation and ability to attract investment. “If I were a potential investor and I wanted an airline as part of my portfolio, I might look at what has happened and say, ‘There could be a change of direction, and the board and senior management are clearly spending a lot of time on these issues – I’d best go elsewhere.’”

The potential for disagreement with shareholders is perhaps greatest when a company wants or needs to scale up. “We are all focused on expanding and getting to some sort of global domination as an ambition,” says Stent. “But the speed at which we want to do this can be quite different.

“Everyone has slightly different experiences: some people have been burnt going into Asia, others when going into the US. How you tackle that next stage can often be the subject of quite heated debate.”

Resolving that debate requires good communication as well as a strong evidence base, Stent adds. “I think that setting out your strategy and having regular meetings with your shareholders is very important. If the shareholders want to do something that the management don’t, for example, it’s beholden to the management to explain and get the data points to prove or disprove the direction that comes through.”

However, she says: “I think a little bit of healthy tension is not a bad thing, as it generally leads to better decisions.”

Talk, talk

Chris Newlands, founder and CEO of travel social media site talkholiday, says: “The more you keep shareholders informed, the better: they tend to get edgy if you don’t communicate with them. Fundamentally, it’s about trying to keep them on side – not necessarily always telling them what they want to hear, but being factual and honest. In my experience, that means you gain more trust.”

Hildyard says that while AGMs clearly play a major role in communicating with investors, most engagement with major shareholders tends be done privately. “Face-to-face meetings or phone conversations with board members are very important: that’s the main way that investors get a feeling for the direction of the company they’re investing in.”

Pousson adds that the analysts employed by major institutions to assess current and potential investee companies are starting to take a more qualitative approach. “I was talking to a director of operations for a hotel group listed in Ireland and the UK,” he says. “What he’s observing is that when he meets analysts, the questions have become far more strategic in nature. In effect they are saying, ‘We can see the numbers – but talk to us about what you intend doing.’”

Hildyard adds: “What our institutional investor members say is that they want to know more about the brand and the human capital of organisations. Having honest and robust quantitative evidence about new market opportunities is really important; but if a company can communicate a qualitative sense of their capabilities as a management team and the corporate culture of the company as a whole, that’s very helpful too.”

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