What Investors Can Learn from a Company’s Shareholder Composition

By Allen He

The shareholder engagement landscape has rapidly evolved these past few years. This isn’t surprising, with investors requesting increasingly detailed disclosures of topical issues like climate goals and DEI metrics. Sustainability and long-term strategy issues have gained significant traction amongst institutional investors (especially during recent proxy seasons), rising to a crescendo last year with the election result of Engine No. 1 and Exxon Mobil.

In the four years since Driving the Conversation: Long-Term Roadmaps for Long-Term Success was published, there has been an uptick in exploration of how introducing these contemporary issues affects the investor-corporate dialogue – a key lever that influences behavior for investors and companies alike. This essential discourse can either serve as a source of short-term pressure or long-term support.

For companies, cultivating a base of longer-term shareholders allows managers to refocus their strategy on the long term. As expected, evidence shows having the support of long-term shareholders provides a buffer against being derailed by short-term shareholders and activists.

By contrast, recent activist campaigns and proxy battles have signaled to investors that equal ownership in companies (e.g. 1-2% of each company) does not translate to equal engagement opportunities across companies. Companies will be receptive to engagement to varying degrees – with productive dialogue achieved by investors in some cases while being stonewalled by the company in others. Rather than fighting losing battles, investors could use analysis of the composition of a company’s shareholder register to focus their resources on companies amenable to change.

Using different engagement tactics for companies with different circumstances requires a fair degree of flexibility. To better understand how to tailor investor-corporate dialogues effectively, FCLTGlobal is currently conducting research on the nuances of matching the right engagement strategy to the right company.

Preliminary results based on analysis of market trends, capital allocation behavior, and characteristics of shareholder bases across our sample of the largest companies globally show that:

Contrary to popular belief, shareholder bases vary widely across large companies worldwide. For example, the idea of a heavily indexed firm owned primarily by institutional investors is only a reality for select companies in the US and UK but does not apply to Canadian and other European companies.
It is beneficial for a company’s shareholder base to consist of more long-term shareholders¹. All else being equal, a 10% increase in the proportion of long-term shareholders is associated with an 8% increase in 5-year ROIC in the US and a 4% increase in European companies.
Not surprisingly, companies with more short-term shareholders exhibit traits of short-termism, such as higher prevalence of quarterly guidance, lower ESG and board diversity scores, and higher leverage.
Firms with high government or ‘insider’ shareholders are idiosyncratic anomalies – they can be high-risk/high reward, warrant careful consideration, and may be difficult to influence from an investor’s point of view. These firms tend to have higher, but more versatile, long-term ROIC and sales growth compared to their peers. They also have roughly the same volume of shareholder proposals compared to peers, but less than half the success rate.

In recent conversations with FCLTGlobal members and other subject matter experts on this topic, several other interesting insights emerged:

Curating a longer-term shareholder base is imperative for insulating companies against short-term pressures. But it’s also important to keep a constructive relationship with short-term and activist shareholders to maintain a sense of the full picture, as they may raise concerns that will be shared by other shareholders.
Geography matters for both companies and investors. For investors, engagement success rates and topics of interest can vary based on a company’s country of domicile. For multinational companies, attracting foreign shareholders can provide a broader range of views on pertinent global issues.
Investors who are more open-minded and less prescriptive in their engagements have the most potential for a productive investor-corporate dialogue. Engagement is a two-way street. Investors that trust the leaders of the company to adopt an inclusive, consistent, collaborative approach in voicing their opinions are more likely to succeed.

As we continue to gather perspectives on this topic, our survey focusing on recent disconnects in the engagement experience between investors and portfolio companies is live. Results will be shared at our next Working Group on this topic in September.

As always, if you have any questions about this work, please contact [email protected].

^{1. Note: classifications as defined by Bushee (1998), data taken from Refinitiv Eikon.}