Over the past few months, we’ve been startled and rather shaken by the number of investor relations professionals who’ve told us that their shareholder relations programs, or their DRPs, and sometimes their individual investor population as a whole, are "not terribly important to their company, strategically." Coming from folks who make their living caring for individual investors, we found this exceedingly scary.
We’ve also encountered a lot of folks who pay lip service to the importance of individual investors, but whose actions – or lack thereof – convey quite a different message.
On a more positive note, however, a lot of readers have been asking for tips on improving the quality of their individual shareholder population – and one ways to get the idea across to their top management that the necessary investment of time and money represents money well spent.
We hope you’ll keep our gardening analogy in mind, which strikes us as an apt one, as you read our top 10 list. In investor relations, as in life, "as you sow, so shall you reap."
- Individual investors stay with you for the long–term: Seven years is about the average for all companies, 20 years for "better than average companies" and many investors in companies with the best–known brands, or among the "most admired companies" are second, third, or even fourth generation investors. What’s the big deal about this? A hard core of long–term investors is a must; if you company is to have the time it needs to executive its long–term strategies.
- If you have 40% or more of your stock in "safe hands" (and please note that virtually all these hands belong to long–term individual investors) it becomes prohibitively expensive, if not downright impossible, for impatient institutions, or vulture capitalists to wrest control of your company strategy, or your company as a whole, away from your board: Will it make your company takeover proof? Of course not. Your long–term investors will gradually disinvest, and even the most patient will tender to a raider if they ultimately lose faith in your long–term vision. But note well; typically, it’s the walking away of long–termers that gives institutional investors (most of whom are not "investors" at all in the dictionary definition of the word) both the idea, and the critical mass "to take your company out" at a consequently distressed valuation.
- Individual investors provide a mighty floor to support your stock price… especially in distressing times: It’s not just because they continue to "buy on the dips," because their modest buying power can usually be outgunned big–time by bearish institutions… who can always rebuy later and lower. It’s also because most individual investors have a "floor" of their own; lower than which they simply won’t sell. As long as you have a critical mass of them, as long as you can keep them from panicking, they’ll eventually put the brakes on the most bearish of bear raids.
- A solid core of individual investors moderates stock price volatility. This, it’s very important to note, is good for all investors. Some degree of volatility is good for your stock – especially those upticks – and no volatility is no good – because you’ll fall off, or never get on, the traders’ radar screens. But let’s face it; all investors – or their heirs – will have to sell some day. And usually, it’s because they need the cash now. And, when that day comes – whether you’re a regular stockholder, or an employee stockholder with a lot of your assets in company stock or stock options, or the Chairman of the Board – you don’t want to see the stock off 20% that day because earnings fell one cent short of institutional "expectations."
- Companies with the right mix of individual investors have a lower cost of capital than companies that are thinly held or over–loaded with institutions: Lower volatility (i.e., less risk to investors) translates to a "premium price" vs. your peers. As in any auction market, the bigger, the healthier, and the happier the crowd of bidders you have, the higher your market premium will be.
- Without a really solid core individual investors, your company’s stock can become constantly whipsawed by volatility or, just as bad, can get permanently stuck in the mud: The "good" institutions won’t touch it if a meaningful investment on their part will send your price soaring – or if a sell decision will drive your price down by five or ten percent. But speculators will have a field day when your stock is too thinly owned, or over–owned by short–termers.
- Individual investors will provide your company with huge amounts of extremely low cost long–term capital directly – if you let them: Electric utilities have been using DRPs and ESOPs to raise half or more the total equity capital they’ve needed for the past 25 years. And, they’ve raised it for pennies per share, vs. the 6–7% they’d pad over to the underwriters in a public offering. When major U.S. banks needed to dramatically boost their capital base in the eighties, they did the same. (This fact makes it truly amazing that other kinds of companies haven’t followed suit. All we can think is that (a) the corporate staffers who handle such matters are asleep at the switch or (b) those "free" U.S. Open or Wimbledon tickets the underwriters hand out are really worth millions.)
- Individual investors build significant "brand equity" for your company, which, even most accountants agree these days, can account for 5% or more of your stock price: most comments about the power of DRPs and DSPPs – the Optimizer included – have focused on consumer companies. And there’s lots of hard evidence to show just how strong and how powerful the stockholder/consumer linkage can be.
But, a 5% "hit" to your stock price – in either direction – represents really serious money for any company. On the upside, look at the monster P/E multiples that brand name companies are now commanding.
On the downside, think about MOTOROLA, one of our favorite whipping posts of late, for the back–of–the–hand treatment they’ve given their long–term individual investors, which we think is at least as much of a cause as it is a symptom of their woes these past few years. Once it was one of America’s "most admired companies" renowned for its high quality products, outstanding consumer service and product innovation. There’s a chick and egg aspect to the "most admired" aspect, of course, since stock price performance appears to be a main driver, but that’s a key part of the point: Pretend you’re the purchasing agent for one of Motorola’s biggest corporate accounts, and ask how much harder you’re obligated to push them; how much harder you will push them, how much more they can and will be pushed, and how many other folks are pushing in on every front since they’ve lost so much of their "brand equity" or "aura". - Analysts, institutional investors and retail brokers are individual investors too: And all of them want exactly the same thing from your IR efforts: a reason, or a set of reasons, to invest, and to stay on as long–term investors – delivered with all the clarity, simplicity and plain English you can muster, and with a person touch. You’ll get a much bigger band for your IR buck if you take this into account, and, as a result, design your programs and write your materials with individual investors in the forefront of your thinking.
- Individual investors are not nearly as costly to maintain – especially in the total scheme of things – as most companies seem to think: For starters, you’re going to have them anyway… no matter what you do. (The real irony is that like any other crop, the less you do to cultivate it, the less it’s actually worth to you.) Compared to what the typical company spends on its total marketing, advertising, image building, and "brand equity" campaigns, the shareholder relations budget is a drop in the bucket. Compared to what you’d have to spend to build a good base of investors from scratch – or worse, to rebuild one that’s been run off – it’s hardly a line on the corporate budget. And, if you buy into the "big picture" – the cost of capital and the brand equity aspects – your shareholder relations expenditures are not only a mere pittance – but, probably, a lot less than they ought to be.
Plus… One last tip to grow on.
- Sure it costs money to maintain an effective investor relations program. And, of course, the more effective it is, the more investors you’ll have. But this should be cause for bragging, rather than for the complaining we often hear about the costs, given the mega–value that a rock–solid investor base delivers to the company as a whole. Ask yourself, as a corporate citizen (whose health and well being is near and dear to our hearts): Is having a big budget really such a bad thing?
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