14 December 2017
By the time this CFO Magazine is published, most listed companies will have presented their third-quarter figures. The final sprint to achieve a good year has started, with the hope of meeting market expectations. So, what are ‘expectations’ and what is ‘the market?’ In practice, these conceptions are more complex than ever. As regards the market, I would like to zoom in on shareholders. I deliberately do not say the shareholders. After all, ‘the shareholder’ ceased to exist a long time ago. The differences between shareholders are such that it is difficult to draw up policies accordingly, let alone satisfy all of them.
You probably have an image of activist shareholders, merely because they are the most vocal and visible to the public. The question is whether the term activism is an adequate description when it comes to the categorisation of shareholder groups.
After all, (Dutch) pension funds do make their voices heard when it comes to sustainability and management compensation. They can be just as vocal and visible in this regard, if only out of a profiling desire towards fund participants.
Pension funds often characterise their share ownership by their long-term shareholdings. That is entirely different from all the rubbish of investors who are shareholders for a few months, demand the sale of the company and then claim that they are in it for the long term. For this reason, it seems sensible to categorise shareholders into long-term, medium-term and short-term categories. This categorisation will undoubtedly help to adopt a more differentiated investor relations policy, which is urgently needed. There is an argument for letting shareholders know which category your company has placed them in. Why? Because it clarifies the relationship and mutual intentions.
This is not an entirely new idea. After all, directors of some of the major Dutch funds have been suggesting a different treatment for loyal shareholders when it comes to dividends for some time. The new Corporate Governance Code also makes a distinction. An interesting question is whether the categorisation can be substantiated in law. I suspect this may be tricky. Perhaps this is a task for the legislator. Would it be possible to come up with a legal framework for long-term, mid-term, and short-term categories? Perhaps shareholder’s intentions would provide a very efficient and fairer assessment framework.
It is also possible to make another categorisation: shareholders who do and shareholders who do not support the strategy. The Dutch courts have already sufficiently defined that the management board is in charge of the strategy, and not the shareholders. So, either you do or you do not subscribe to the strategy. In the latter case, you can sell your shares and invest in a company with a strategy that you do subscribe to.
However, it is not that simple because short-term shareholders instead use the tactic of achieving short-term returns through strategy changes. For directors, it increasingly comes down to the question of whether or not they want to lay their strategies on the table. Whereas some are open to suggestions for strategy adjustments, others are not because they are convinced that they are on the right track. In both cases, directors must be able to explain clearly what their positions are and that these are in line with the expectations raised. The latter is the point at issue.
This column is a translation of the Dutch publication in CFO Magazine