Of all the well-worn clichés that should be retired, “maximizing shareholder value” is surely toward the top of the list. Since private companies don’t have constant public market feedback, attempts to “maximize” shareholder “value” are destined to end in frustration. While private company managers are not able to gauge instantaneous market reaction to their performance, they do know who their shareholders are. Wouldn’t it be better to make corporate decisions based on the characteristics and preferences of actual flesh-and-blood shareholders than the assumed preferences of generic shareholders that exist only in textbooks? If so, there is no substitute for simply asking. Here’s a quick list of five good reasons for conducting a survey of your shareholders.
- 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 what deeper characteristics owners share and what characteristics distinguish owners from one another. We recently completed a survey for a multi-generation family company, and not surprisingly, 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 was surprising was that the clienteles were 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.
- A survey will help you gauge shareholder preferences. The results from a shareholder survey will help directors and managers move away from abstract objectives (like “maximizing shareholder value”) toward concrete objectives that actually take into account 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 deliberating over these decisions.
- 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 information about the company to shareholders. In our experience, the survey is most effective if preceded by a brief education session that reviews the types of questions that will be 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 prove to be more engaged in management’s long-term strategy.
- 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, and many public companies invest significant resources in the investor relations function because they recognize that it is critical that the markets understand not just the bare “what happened” of financial reporting, but the “why” of strategy. Oddly, for most private companies, there is no roadmap for communicating results, and investor relations is either ignored or consists 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 for proactively communicating operating results to shareholders. An informed shareholder base that understands not only “what happened” but also “why” is more likely to take the long-view in evaluating performance.
- A survey gives a voice to the “un-squeaky” wheels. A shareholder’s input should not be proportionate to the volume with which the input is given. While the squeaky wheel often gets the grease, it is prudent for directors and managers to solicit the feedback regarding the needs and preferences of quieter shareholders. Asking for input from all shareholders through a systematic survey process helps ensure that the directors and managers are receiving a balanced picture of the shareholder base. A confidential survey administered by an independent third party can increase the likelihood of receiving frank (and therefore valuable) responses.
