You heard of quality companies, but what about quality shareholders? I find the idea of “quality shareholders” very interesting. The topic is further explored by Professor Lawrence Cunningham. You can read more on the topic with the following paper: The Case for Empowering Quality Shareholders and Professor Cunningham has a book coming out this fall: Quality Shareholders: How the Best Managers Attract and Keep Them (Pre-order)
Here’s the preview from the book:
Anyone can buy stock in a public company, but not all shareholders are equally committed to a company’s long-term success. In an increasingly fragmented financial world, shareholders’ attitudes toward the companies in which they invest vary widely, from time horizon to conviction. Faced with indexers, short-term traders, and activists, it is more important than ever for businesses to ensure that their shareholders are dedicated to their missions. Today’s companies need “quality shareholders,” as Warren Buffett called those who “load up and stick around,” or buy large stakes and hold for long periods.
Who are the quality shareholders?
Quality shareholders can be defined by these characteristics:
- They are long-term shareholders. They believe in the vision and management. They stick around for a long time.
- They are concentrated owners. They own blocks of shares.
- They are studious shareholders with a focus on operations. They are not indexers or complacent.
Why have them?
Companies may benefit from a high density of such shareholders. They can be a source of lower cost of capital and are possibly available for consulting.
Also they can offset the balance between other shareholders. If you have an activist trying to rock the boat, the concentrated ownership of quality shareholders can be a source of stability
Or just think of what could happened if you didn’t have quality shareholders. If you shareholder base is composed of mostly indexers, traders or speculators, they might just bolt on you during the next market downturn. This will result in higher financing cost or possibly open the door for a takeover (maybe from a company with quality shareholders!)
Where do you find them?
It’s tough to be a publicly traded company. Eyes are on your every three months. If you don’t hit guidance your stock takes a hit. That’s not a way to run a company.
Today’s shareholders demographic is indexers heavy. They buy the index. They don’t care about the particulars of the business. They focus on the market returns. They don’t bring much to the table.
So where do you find these high quality angels?
Well it’s like anything in life. Do you have what it takes to attract them? Do you deserve them?
- What corporate actions are you taking to attract them?
- What message to you communicate?
- Are you clear, consistent, and rational?
High quality companies choose their shareholders. By that I don’t mean they actually directly pick who will be their shareholders. What I mean is that they put the conditions in place to attract quality shareholders. Of course a publicly traded company is not going to have 100% quality shareholders. But they might bring a balance to the other groups.
I’m reminded by the old saying “birds of a feather flock together”. You attract what you deserve. It’s the same in life. Your partner in life, your circle of friends. How often do you see a smoker hanging out with a group of fit people? Not often. But if it happens you can tell it doesn’t fit. It’s the same when it comes to shareholders.
One idea is to end quarterly guidance and focus on the long-term plan of the business. And execute accordingly. Remember quality shareholders are not passive. It doesn’t mean you are a free pass. If you say you will deliver Italian food and you show up with fast food, they are not going to sit there quietly.
I’m reminded of a Phil Fisher analogy (author of the famous book Common Stocks and Uncommon Profits). Phil Fisher once compared companies to restaurants. Over time through a combination of policies and decisions, they self-select for a certain clientele. Are you serving fast food or 5-star dining? Two different crowd.
Here’s a couple Warren Buffett quotes from a presentation Professor Cunningham did on the topic. A link to the recording is here.