Are you a Shareholder or a Shareowner?

2018-11-08T15:41:10+00:00August 8th, 2018|Opinion Pieces|

If you stopped someone in the street and asked “What does it mean to be a shareholder” what do you think they would say? Would their response change if you asked: “What does it mean to be a shareowner”? Do many people differentiate between the two?

To my mind, there has always been a fundamental difference.  They sound similar but in reality are like night and day. A shareowner invests in a company and acts as a co-owner.  A shareholder passively holds the asset without getting involved.

Being an active owner of a company requires you to effectively engage with management and stakeholders on a range of strategic issues. It can add significant value to a business if you can provide assistance in addressing risks, reducing inefficiencies and improving operational and ESG (environmental, social and governance) standards. In many circumstances, this type of engagement and support can eventually lead to a higher valuation of the business. A recent study shows that companies implementing changes to environmental, social or governance standards following engagement from investors, generated more than 7% of excess returns after 18 months.

When I started my career as an emerging and frontier markets investor in the late 90s (at that time frontier markets did not even exist as an asset class) it was much more difficult and even uncommon to behave as a real shareowner. Exercising voting rights was perceived as the highest possible level of corporate engagement. Attempting to partner with portfolio companies on strategic business issues was simply not done. For many investors, meeting with a listed company was seen as an exception rather than a rule.

Thankfully today the situation looks different. Institutional investors exercise their rights in most (if not all) of their portfolio companies. As a result, parties with controlling stakes are increasingly aware that all meaningful decisions (taken at or outside of a shareholder meeting) will be scrutinized, assessed and voted on by minority shareholders. This has changed the dynamic between majority/minority investors and has led to a significant improvement in corporate governance standards. This can only be a positive development for all investors, but particularly shareowners.

Unfortunately, some investors have not capitalised on the opportunity to have more involvement and as a result, continue to keep companies at arm’s length. It is common practice for many investors to vote blindly in accordance with recommendations from a small group of influential proxy advisors. Therefore, the votes of a significant proportion of investors are decided by the views of a few analysts. This can be ineffective as specialists often apply the same principles across all markets without factoring in local market standard practices, regulations, differing level of capital market development and local cultures. One size does not fit all.

In other instances, institutional investors are engaged but still allow the proxy to exercise their votes i.e. in their absence delegate their voting power to a representative. While this form of shareholding is often easy, as it saves time and money, it also significantly reduces the pressure and scrutiny on executives and boards during meetings. There is no better way to mark yourself out as a true shareowner than to take up your right to look executives straight in the eye and ask them the difficult questions.

Opportunity for constructive engagement in EM and FM