Clarkston Consulting https://www.facebook.com/ClarkstonConsulting https://twitter.com/Clarkston_Inc https://www.linkedin.com/company/clarkston-consulting http://plus.google.com/112636148091952451172 https://www.youtube.com/user/ClarkstonInc
Skip to content

Improving Financial Outcomes Through Greater Shareholder Engagement

In the age of personalization and increasingly distinct consumer preferences, many companies are facing heightened activism on the part of their shareholders. Johnson & Johnson is the latest company to field a plethora of proposals from its investors, the most prominent in regards to drug pricing risks and executive compensation. This might seem threatening to Jonhnson & Johnson’s financial health, but these proposals come from the same goals for success for which Johnson & Johnson’s executives strive. As cases like this become more frequent, companies should consider the strategic opportunities that can arise from shareholder engagement.

Publicly traded companies like Johnson & Johnson must continually manage fluctuating financial health while fielding the preferences, desires, and stipulations of their shareholders. The agency of executives who aim to expand company assets can often find itself in a perpetual headlock with that of investors who worry about the effects of dilution on returns. Every executive board faces this same issue, but surprisingly few studies have explored the ways in which communication with shareholders and their subsequent involvement in business initiatives can positively benefit a company’s financial outlook.

While it’s easy for executives to want to dismiss the suggestions of shareholders, executives should keep in mind that overall, everyone involved has the same end goal: growth through an increase in the company’s value. Following this insight, several studies and analyses suggest that greater shareholder engagement can help publicly-traded companies outrun their competitors.

In a 2018 meta-study by Clifford Holderness of Boston College, shareholder approval of stock issuances is found to be correlated with positive announcement returns. In comparing across firms in 23 countries, the overall stock price reaction to issuances of equity by public corporations was, on average, positive when current shareholders had approved the issuance and negative when they had not (2% versus -2). These results hold across and within countries, no matter the type of stock issuance.

While Holderness’ study suffers from selection bias and we cannot therefore safely infer causation, the correlation is highly motivating when it comes to considering your shareholder’s vote. For companies headquartered in countries such as Canada, Israel, Japan, or the U.S. where shareholder approval isn’t mandatory, public offerings have consistently triggered negative returns in the post-announcement quarter. After considering that dominions like Finland and Singapore (who champion shareholder involvement) have average 4% higher returns after gaining shareholder approval, it stands to be reasoned that greater investor input not only gives the public a more positive speculation of a company’s value, but can also be fruitful to the company’s inner workings and future efficiency.

What Can My Shareholders Offer Me?

Although broad public offerings are a good way to gain fast equity, companies should consider the implications of their actions when it comes to the social market that influences stock returns. When executives unilaterally issue stock, simple economic surplus drives down value in conjunction with the common public assumption that the company is pursuing incautious growth. By facilitating communication with investors and involving them in more strategic stock decisions, these threats to firm value can be mitigated and a better long-term growth strategy can be achieved. Additionally, rights offers to shareholders in particular can reduce inefficiency and information asymmetry between managers and shareholders on firm value and trajectory.

What Can I Do to Improve Shareholder Engagement?

To enhance shareholder engagement, businesses should first invest in shareholder education. While investors would typically view broad stock issuances negatively, educating them about the long-term strategy to better mitigate their qualms over financial expansion. When faced with shareholder activism this past spring, Nestlé chairman Paul Bulke opened discussion with investors about the company’s long-term goals and was able to field investor concerns by championing a collaborative pursuit of Nestlé’s future success.

Additionally, this education can help protect your company’s stock from volatility. By offering increasing shareholder power or benefits by rewarding tenure, your company can not only build a community of mindful partners, but also protect from market volatility through high turnover rates. From the other side, shareholders can provide an insider’s perspective on market expectations, industry trends, and consumer preferences.

This improved collaboration encourages shareholders to remain for the long term.  A Journal of Financial Economics study found that companies with a majority of high-turnover shareholders regularly underperformed in the market, consistently overpaid for acquisitions, and were sold at discount in mergers. In today’s industry, just as consumers are prioritizing experience and personalization, companies should better cater to their shareholders to improve long-term financial outcomes.

One key way to give shareholders an inside look is by formulating robust Corporate Social Responsibility Reports. These reports are an efficient way to clearly communicate your company’s long-term goals while providing investors with distinct progress charts of the impacts of various business activities over time. This encourages loyalty to your brand’s mission while giving investors peace of mind and can even be an avenue for fostering three-way communication between you, your board, and your shareholders.

Lastly, a more hands-on approach to the shareholder engagement can promote your company’s financial growth by situating investors comfortably no matter their avenues for involvement. Just like consumers, shareholders live in a digital world. Per an analysis by Broadridge, 95% of investors are active online and the number of shareholder meetings taking place digitally more than tripled over the last six years. This means that investment in digital capabilities and regulatory protection are crucial to companies looking to partner more closely with shareholders. With the convenience of digital communication and access to materials, you can create a more meaningful and personal shareholder experience. Here, data analytics capabilities also become extremely important, as understanding your shareholders can increase equity by allowing you to better project voting outcomes and take action in response.

Takeaways

The case of Johnson & Johnson and their investors can model the benefits of increased communication between companies and their stock-owning partners. Interactions between these two bodies can bring useful market insights to executives and allow them to build better relationships with their shareholders, leading to a less adversarial and more effective governance in the future.

After all, shareholders should be a company’s ambassadors in the market, and their satisfaction will bleed into market speculations whether a company addresses it or not. Thus, personalization, convenience, and efficiency can together foster higher investor involvement and improve the long-term financial health of your company. As Industry 4.0 takes hold, companies must leverage every strategic component to maximize their competitive edge, creating a launching pad for long-term success.

Subscribe to Clarkston's Insights

  • I'm interested in...
  • This field is for validation purposes and should be left unchanged.

Coauthor and contributions by Kyleigh Andries

Tags: Strategic Advisory, Strategy
RELATED INSIGHTS