2014 study on how investment horizon and expectations of shareholder base impact corporate...

2014 STUDY ON HOW INVE STMENT HORIZON AND E X PEC TAT IONS OF SHAREHOLDER BA SE

IMPAC T C ORP OR ATE DEC IS ION - MAK IN G

TA B L E O F C O N T E N T S

Executive Summary and Key Findings .............. 1

Review of Findings ........................................ 3

Demographics ............................................14

Methodology ..............................................16

About the Authors .......................................17

About NIRI and the Rock Center ....................18

Contact Information .....................................18

2014 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making 1

Executive Summary and Key FindingsNearly 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 138 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 (65%) 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 (51%) believe that short-term investors lead a company to focus on cost cutting. The majority of companies (57%) 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 26% 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 short-term 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 (92%) 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 2.8 years. By contrast, short-term investors are seen as having an investment horizon of 7 months or less.

Not surprisingly, most companies agree or strongly agree that desirable shareholders are not activists (87%). 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 7% 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 92% 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.


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 60 percent reduction. One reason for the reduction seems to be that hedge fund investors are seen as short-term oriented. 94% 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 (80%) 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 15% and share price volatility decrease 20%. 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 (76%) 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 (91%) discuss the composition of their shareholder base at the senior executive level. A large majority (75%) discusses this at the board level. On average, the CEO spends 4.2 days per quarter managing the company’s shareholder base. As might be expected, the CFO spends even more time – 6.4 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 three-quarters of the companies use these tools at least on a quarterly basis. Significantly fewer companies actively approach potential shareholders with more than 40% of companies pursuing this strategy less than twice a year.


Review of Findings

Composition of Shareholder Base

1. What is the investment horizon of a typical investor (in years)?

Short-term investor 0.6 years or less

Medium-term Between 0.9 and 2.3 years

Long-term 2.8 years or longer

2. How important are the following to a long-term investor?

Next quarter’s earnings Percent

1Extremely important

67Somewhat important

31Not at all important

Stable/smooth earnings path Percent




Growth opportunities Percent


5Somewhat important


Cost cutting Percent




Payout policy (dividends and share repurchases) Percent




Active engagement with the company regarding management decisions Percent




Sustainability of the firm’s business model Percent


2Somewhat important



3. What is the typical investment horizon of the following shareholder groups?

Retail shares held in street name Percent

13Long-term

21Somewhat long-term

33Medium-term

23Somewhat short-term

9Short-term

Retail shares held in personal name Percent

25Long-term


30Medium-term


4Short-term

Passive Fund – Index Percent

46Long-term


13Medium-term


4Short-term

Active Fund -Growth Percent

6Long-term


38Medium-term


4Short-term

Active Fund – Value Percent

17Long-term


30Medium-term


1Short-term

Hedge Fund; long/short positions Percent

0Long-term

0Somewhat long-term

6Medium-term


67Short-term


Pension Fund Private Percent

39Long-term


20Medium-term


0Short-term

Pension Fund Unions Percent

36Long-term


16Medium-term


0Short-term

Pension Fund Public Percent

42Long-term


12Medium-term


0Short-term

Activist Individual Percent

1Long-term

3Somewhat long-term

17Medium-term


41Short-term

Activist Fund Percent

1Long-term

4Somewhat long-term

22Medium-term


37Short-term

Top Management Percent

77Long-term


4Medium-term


0Short-term


Directors of the company Percent

76Long-term


6Medium-term


0Short-term

Employee stock ownership plan (ESOP) Percent

53Long-term


18Medium-term


3Short-term

4. What is the current composition of your company’s shareholder base?

Percent

7.6Retail shares held in street name

3.7Retail shares held in personal name

14.3Passive Fund – Index

23.0Active Fund – Growth

15.3Active Fund – Value

8.1Hedge Fund; long/short positions

1.8Pension Fund Private:

0.9Pension Fund Unions

1.7Pension Fund Public

0.4Activist Individual

1.3Activist Fund

5.0Top Management

3.4Directors of the company

1.4Employee stock ownership plan (ESOP)

8.7Other

3.4Unknown

Note: The differences between Q4 and Q10 is due to different sample sizes. For Q10, the sample size is smaller than for Q4. The “Actual” column on Q10 only includes the firms that responded to the question of the “Ideal” shareholder base.


5. How would you characterize the investment horizon of your company’s current shareholder base?

Percentage of shareholder base best described as Percent

9.5Exclusively short-term

12.2Somewhat short-term

24.7Medium-term

24.1Somewhat long-term

25.6Exclusively long-term

4.0Unknown

Management of Shareholder Base

6. Is the composition of the shareholder base discussed at the C-level or Board in your company?

Board-Level Percent

75Yes

13No

12Don’t know

C-Level Percent

91Yes

7No

2Don’t know

7. How frequently do you employ the following strategies in order to actively manage your company’s shareholder base?

Road shows Percent

37More than quarterly

39Quarterly

12Semi-annually

5Annually

7Less than annually

Investor conferences Percent


33Quarterly

7Semi-annually

7Annually

2Less than annually

Identify and actively approach shareholders (targeting) Percent


28Quarterly

15Semi-annually

12Annually

16Less than annually


Capital Market Day (company specific, no conference) Percent


0Quarterly

2Semi-annually

32Annually


Enable meetings of current shareholders with board members and/or top management Percent


22Quarterly

9Semi-annually

8Annually


Enable meetings of prospective shareholders with board members and/or top management Percent


26Quarterly

8Semi-annually

5Annually


8. How much time do the following executives spend actively managing shareholder base (days/quarter)?

CEO – 4.2 days/quarter

CFO – 6.4 days/quarter

9. How much time does the investor relations function spend actively managing the shareholder base (days/quarter)?

31.3 days/quarter

Ideal Target/Shareholder Base

10. 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% 7.4% -1.6%

Retail shares held in personal name 3.7% 3.9% -0.2%

Passive Fund - Index 15.3% 14.6% 0.7%

Active Fund -Growth 25.0% 23.0% 2.0%

Active Fund - Value 16.9% 14.6% 2.3%

Hedge Fund; long/short positions 3.2% 8.4% -5.2%

Pension Fund Private 3.9% 1.4% 2.5%

Pension Fund Unions 1.6% 1.0% 0.6%

Pension Fund Public 3.6% 2.0% 1.6%

Activist Individual 0.0% 0.0% 0.0%

Activist Fund 0.0% 1.3% -1.3%

Top Management 6.1% 4.3% 1.8%

Directors of the company 3.2% 3.6% -0.4%

Employee stock ownership plan (ESOP) 3.1% 1.4% 1.7%

Other 2.7% 9.8% -7.1%

Unknown 6.1% 3.5% 2.6%

Note: The differences between Q4 and Q10 is due to different sample sizes. For Q10, the sample size is smaller than for Q4. The “Actual” column on Q10 only includes the firms that responded to the question of the “Ideal” shareholder base.


11. 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 Percent

12Strongly agree

46Agree

24Neither agree nor disagree

15Disagree

3Strongly disagree

Management could implement the company’s strategy more effectively Percent

6Strongly agree

33Agree


19Disagree

5Strongly disagree

Management could make better investment decisions Percent

6Strongly agree

24Agree


21Disagree

7Strongly disagree

Management could more easily pursue value-enhancing strategic M&A transactions Percent

7Strongly agree

24Agree


20Disagree

4Strongly disagree

Shareholders would provide higher quality feedback on management’s decision Percent

14Strongly agree

34Agree


10Disagree

4Strongly disagree

Board would be able to focus on business rather than appeasing certain shareholders Percent

8Strongly agree

25Agree


22Disagree

7Strongly disagree


12. To what extent do you agree with the following statements?

“The ideal/target shareholder for our company is characterized by:”

Holding only long positions Percent

14Strongly agree

48Agree


19Disagree

2Strongly disagree

Ownership not over 10% Percent

16Strongly agree

48Agree


12Disagree

1Strongly disagree

Ownership not over 5% Percent

5Strongly agree

24Agree


32Disagree

4Strongly disagree

Non-activist Percent

41Strongly agree

46Agree


2Disagree

0Strongly disagree

Invested at a price below current price Percent

11Strongly agree

46Agree


7Disagree

1Strongly disagree

Invested at a price close to current price Percent

0Strongly agree

21Agree


15Disagree

2Strongly disagree


Long-term investment horizon Percent

51Strongly agree

41Agree


0Disagree

0Strongly disagree

Medium-term investment horizon Percent

12Strongly agree

69Agree


1Disagree

0Strongly disagree

Short-term investment horizon Percent

0Strongly agree

8Agree


46Disagree

24Strongly disagree

Pursues investment strategy focused on growth Percent

15Strongly agree

54Agree


6Disagree

0Strongly disagree

Pursues investment strategy focused on value Percent

7Strongly agree

57Agree


8Disagree

1Strongly disagree

Has preference for increase in dividend payments Percent

6Strongly agree

28Agree


22Disagree

11Strongly disagree


Votes consistently with management Percent

20Strongly agree

37Agree


6Disagree

0Strongly disagree

Does not vote Percent

1Strongly agree

3Agree


42Disagree

20Strongly disagree

Resides in a specific geographical location Percent

0Strongly agree

7Agree


33Disagree

23Strongly disagree

Possesses substantial industry expertise Percent

6Strongly agree

37Agree


9Disagree

4Strongly disagree

13. 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?

Percent

80Yes

20No

14. Suppose you could change the composition of your shareholder base such that the ownership of an ideal investor as described above increases by 10% which of the following benefits would you expect to realize over the next two to three years:

Increase in share price – 15.4% increase

Decrease in volatility – 19.6% decrease

Increase in trading volume – 5.9% increase


15. 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 Percent

7Strongly agree

34Agree


20Disagree

0Strongly disagree

Has reduced long-term growth Percent

6Strongly agree

36Agree


22Disagree

0Strongly disagree

Cannot focus on strategic decisions because of the focus on short-term success Percent

7Strongly agree

58Agree


13Disagree

0Strongly disagree

Focuses on cost-cutting Percent

7Strongly agree

44Agree


12Disagree

1Strongly disagree

Cannot effectively implement the company’s strategy Percent

2Strongly agree

37Agree


19Disagree

2Strongly disagree

Is restricted from making strategic acquisitions Percent

3Strongly agree

22Agree


25Disagree

4Strongly disagree


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)?

$818,423 mean

$550,000 median

How many people work in Investor Relations in your company?

2 mean

2 median

How frequently do you use outside Investor Relation consultants?

Percent

23On an ongoing basis

39Occasionally

38Never

What is the revenue for your company? Percent

15<$500 million

19$500 million to $1 billion

39$1 billion to $5 billion



7>$20 billion

What is the industrial sector for your company? Percent

2Business Services

2Chemicals

2Commercial Banking

1Commodities

2Communications

7Computer Services

9Electronics

7Energy

10Financial Services (other than commercial banking)

4Food and Tobacco

7Industrial and Transportation Equipment

2Insurance

2Lumber and Paper

12Other Manufacturing

8Other Services

5Retail Trade


What is the industrial sector for your company? (continued)

0Transportation

3Utilities

1Wholesale Trade

13Other

What is your gender? Percent

61Male

39Female

What is your age? Percent

3<30

2331 to 40

3741 to 50

2751 to 60

961 to 70

0>70

How long have you been employed in investor relations? Percent

7Less than one year

101 – 2 years

83 – 4 years

115 – 6 years

127 – 10 years

2111 – 15 years

1916 – 20 years

1120 – 30 years

131+ years

What is your title? Percent

39Vice President

12Senior Vice President

1Executive Vice President

31Director

9Manager

7Other


Methodology

Results are based on the survey of 138 investor relations professionals conducted between February and March 2014.


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.

Email: [email protected]

David F. LarckerDavid 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 TayanBrian 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.


AcknowledgementsThe authors would like to thank Matt D. Brusch, Ariel A. Finno, and Michelle E. Gutman for assistance in the preparation of this study.


About NIRI and the Rock Center

About the National Investor Relations Institute

Founded in 1969, 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 3,300 members represent over 1,600 publicly held companies and $9 trillion in stock market capitalization.

www.niri.org

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.

www.rockcenter.law.stanford.edu

Contact Information

For more information on this report, please contact:

Katie PandesAssistant Communications Director

Stanford Graduate School of BusinessKnight Management CenterStanford University655 Knight WayStanford, CA 94305-7298

Phone: 650.724.9152 Email: [email protected]

Ariel A. FinnoDirector-Research

National Investor Relations Institute 225 Reinekers LaneAlexandria, VA 22314

Phone: 703.562.7678 Email: [email protected]

© National Investor Relations Institute and Stanford University | 2014 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making