2014 STUDY ON HOW I NVESTMENT HORI ZON

AND E XPECTATI ONS OF SHAREHOLDER BASE

I MPACT CORPORATE DECI SI ON- MAKI NG
TA BL E OF C ONT E NT S
Executive Summary and Key Findings .............. 1
Review of Findings ........................................ 3
Demographics ............................................14
Methodology ..............................................16
About the Authors .......................................17
About NIRI and the Rock Center ....................18
Contact Information .....................................18
2014 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making 1
Executive Summary and Key Findings
Nearly all companies prefer long-term investors but about half of investors have a shorter horizon
with signicant consequences for companies strategic decisions and stock market performance
Nearly all companies describe their ideal shareholder as having
a long-term investment horizon but about half of companies
shareholder base has a short-or medium-term horizon. As a
result, most companies see signicant upside to managing their
shareholder base and senior leaders spend considerable time
meeting with current and prospective investors.
More than three-quarters of companies in our survey see
signicant stock market benets from managing their shareholder
base, says Professor Anne Beyer, Associate Professor of
Accounting at the Stanford Graduate School of Business and
co-author of the study. Companies believe that if they can
identify and attract the right shareholder base, they will be able to
increase the price of their stock and decrease its volatility.
Companies want long-term shareholders in particular because
it allows them to implement their corporate strategy and make
long-term investments without the distraction and short-term
performance pressures that come from active traders, says
Professor David F. Larcker, James Irvin Miller Professor of
Accounting and Senior Faculty at the Rock Center for Corporate
Governance. We nd that the investor relations department can
create a real competitive advantage by attracting a shareholder
base with the same long-term investment horizon as the
company.
The study, conducted in partnership with the National Investor
Relations Institute (NIRI), surveyed 138 investor relations
professionals at North American companies about the investment
horizon and expectations of their shareholder base and the impact
that these have on corporate decision-making.
Companies believe that short-term investors distract
from strategic decisions
Nearly two-thirds of companies (65%) agree or strongly agree that
a company whose shareholder base is dominated by short-term
investors cannot focus on strategic decisions because of a focus
on short-term results. Just over half (51%) believe that short-term
investors lead a company to focus on cost cutting. The majority
of companies (57%) agree or strongly agree that a company
whose shareholder base is dominated by short-term investors
will have reduced market value and/or reduced long-term growth.
However, being able to make strategic acquisitions is generally not
a concern even if the shareholder base is dominated by investors
with short-term investment horizons (only 26% of companies
indicate strategic acquisitions as an area of concern).
Investors with short-term horizons pay close attention not only to
stock prices in the near term but also the companies short-term
performance as reported in their nancial statements. If short-
term projects yield lower returns on investment than long-term
projects as it is often the case, a shareholder base dominated by
short-term investors can become a real challenge for companies,
says Professor Larcker.
The ideal shareholder base consists of long-term
investors still long-term is not that long
Companies are most likely to describe their ideal shareholder as
having a long-term investment horizon, with the vast majority
(92%) listing this quality. Still, a long-term investment horizon
doesnt have to be that long. On average, companies estimate the
investment horizon of a typical long-term investor to be at least
2.8 years. By contrast, short-term investors are seen as having an
investment horizon of 7 months or less.
Not surprisingly, most companies agree or strongly agree that
desirable shareholders are not activists (87%). About two-thirds
of companies dont want a concentration of ownership and pay
attention to the price at which an investor acquired a companys
shares. The geographical location in which the shareholder
resides plays virtually no role with only 7% of the companies
deeming this an important shareholder characteristic.
Companies want to increase ownership of
management, employees and pension funds
Top management and corporate directors are seen as having the
longest investment horizon among major shareholder groups, with
93% and 92% of companies describing their investment horizon
as long-term or somewhat long-term, respectively. Among other
major shareholder groups, pension funds are seen as having the
longest investment horizon.
2014 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making 2
Companies dont want hedge fund or private
equity investors
When asked to describe their ideal shareholder base, companies
are most likely to want hedge funds to own a lower percentage of
their shares. Currently, companies report that approximately 8% of
their shares are held by hedge funds. Ideally, this gure would be
3%, a 60 percent reduction. One reason for the reduction seems
to be that hedge fund investors are seen as short-term oriented.
94% of companies believe that hedge funds have a short-term or
somewhat short-term investment horizon. Zero companies believe
they have a long-term horizon.
Also, all companies that reported being partially owned by private
equity (PE) want to reduce the ownership of PE investors. In fact,
all of these companies want to see the ownership of PE investors
go down to zero.
Companies believe that their stock price would be
higher if they had their ideal shareholder base
Most companies (80%) believe that their stock price would
trade higher over a two to three year period if they could
attract their ideal shareholder base. On average, companies
estimate their stock would rise 15% and share price volatility
decrease 20%. These stock-market effects seem to be driven
by companies beliefs that a more suitable shareholder base
would allow management to implement the companys strategy
more effectively, put less pressure on management to focus
on short-term results, and provide higher quality feedback on
managements decision. Three-quarters of companies (76%)
agree or strongly agree with at least one of these three factors
being a benet of attracting their ideal shareholder base.
Companies see very large, tangible benets to managing their
shareholder base, so there seems to be a real opportunity for
some companies to improve corporate decisions and increase
their value by paying close attention to who holds their shares,
says Professor Beyer.
Senior leaders spend considerable time managing
their shareholder base
Almost all companies (91%) discuss the composition of their
shareholder base at the senior executive level. A large majority
(75%) discusses this at the board level. On average, the
CEO spends 4.2 days per quarter managing the companys
shareholder base. As might be expected, the CFO spends even
more time 6.4 days on average.
The amount of time senior leaders spend on developing their
companys shareholder base shows a real recognition of the
importance of shareholder characteristics for a companys
performance. Understanding how shareholders affect management
decisions is key for any company, says Professor Larcker.
Companies rely on road shows and investor
conferences fewer companies actively reach out to
potential investors
When it comes to actively managing their shareholder base,
companies most frequently rely on investor conferences, road
shows, and meetings of current and potential shareholders
with top management or members of the board. About three-
quarters of the companies use these tools at least on a quarterly
basis. Signicantly fewer companies actively approach potential
shareholders with more than 40% of companies pursuing this
strategy less than twice a year.
2014 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making 3
Review of Findings
Composition of Shareholder Base
1. What is the investment horizon of a typical investor
(in years)?
Short-term investor 0.6 years or less
Medium-term Between 0.9 and 2.3 years
Long-term 2.8 years or longer
2. How important are the following to a long-term investor?
Next quarters earnings Percent
1
Extremely important
67
Somewhat important
31
Not at all important
Stable/smooth earnings path Percent
49
Extremely important
45
Somewhat important
7
Not at all important
Growth opportunities Percent
95
Extremely important
5
Somewhat important
0
Not at all important
Cost cutting Percent
17
Extremely important
69
Somewhat important
14
Not at all important
Payout policy (dividends and share repurchases) Percent
46
Extremely important
46
Somewhat important
8
Not at all important
Active engagement with the company regarding
management decisions Percent
30
Extremely important
47
Somewhat important
22
Not at all important
Sustainability of the rms business model Percent
98
Extremely important
2
Somewhat important
0
Not at all important
2014 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making 4
3. What is the typical investment horizon of the following
shareholder groups?
Retail shares held in street name Percent
13
Long-term
21
Somewhat long-term
33
Medium-term
23
Somewhat short-term
9
Short-term
Retail shares held in personal name Percent
25
Long-term
22
Somewhat long-term
30
Medium-term
17
Somewhat short-term
4
Short-term
Passive Fund Index Percent
46
Long-term
31
Somewhat long-term
13
Medium-term
6
Somewhat short-term
4
Short-term

Active Fund -Growth Percent
6
Long-term
33
Somewhat long-term
38
Medium-term
19
Somewhat short-term
4
Short-term
Active Fund Value Percent
17
Long-term
41
Somewhat long-term
30
Medium-term
11
Somewhat short-term
1
Short-term
Hedge Fund; long/short positions Percent
0
Long-term
0
Somewhat long-term
6
Medium-term
28
Somewhat short-term
67
Short-term
2014 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making 5
Pension Fund Private Percent
39
Long-term
39
Somewhat long-term
20
Medium-term
2
Somewhat short-term
0
Short-term
Pension Fund Unions Percent
36
Long-term
46
Somewhat long-term
16
Medium-term
2
Somewhat short-term
0
Short-term
Pension Fund Public Percent
42
Long-term
46
Somewhat long-term
12
Medium-term
1
Somewhat short-term
0
Short-term
Activist Individual Percent
1
Long-term
3
Somewhat long-term
17
Medium-term
39
Somewhat short-term
41
Short-term
Activist Fund Percent
1
Long-term
4
Somewhat long-term
22
Medium-term
36
Somewhat short-term
37
Short-term
Top Management Percent
77
Long-term
16
Somewhat long-term
4
Medium-term
3
Somewhat short-term
0
Short-term
2014 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making 6
Directors of the company Percent
76
Long-term
16
Somewhat long-term
6
Medium-term
2
Somewhat short-term
0
Short-term
Employee stock ownership plan (ESOP) Percent
53
Long-term
22
Somewhat long-term
18
Medium-term
4
Somewhat short-term
3
Short-term
4. What is the current composition of your companys
shareholder base?
Percent
7.6
Retail shares held in street name
3.7
Retail shares held in personal name
14.3
Passive Fund Index
23.0
Active Fund Growth
15.3
Active Fund Value
8.1
Hedge Fund; long/short positions
1.8
Pension Fund Private:
0.9
Pension Fund Unions
1.7
Pension Fund Public
0.4
Activist Individual
1.3
Activist Fund
5.0
Top Management
3.4
Directors of the company
1.4
Employee stock ownership plan (ESOP)
8.7
Other
3.4
Unknown
Note: The differences between Q4 and Q10 is due to different sample
sizes. For Q10, the sample size is smaller than for Q4. The Actual
column on Q10 only includes the rms that responded to the question of
the Ideal shareholder base.
2014 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making 7
5. How would you characterize the investment horizon of your
companys current shareholder base?
Percentage of shareholder base best described as Percent
9.5
Exclusively short-term
12.2
Somewhat short-term
24.7
Medium-term
24.1
Somewhat long-term
25.6
Exclusively long-term
4.0
Unknown
Management of Shareholder Base
6. Is the composition of the shareholder base discussed at the
C-level or Board in your company?
Board-Level Percent
75
Yes
13
No
12
Dont know
C-Level Percent
91
Yes
7
No
2
Dont know
7. How frequently do you employ the following strategies in
order to actively manage your companys shareholder base?
Road shows Percent
37
More than quarterly
39
Quarterly
12
Semi-annually
5
Annually
7
Less than annually
Investor conferences Percent
50
More than quarterly
33
Quarterly
7
Semi-annually
7
Annually
2
Less than annually
Identify and actively approach shareholders (targeting) Percent
29
More than quarterly
28
Quarterly
15
Semi-annually
12
Annually
16
Less than annually
2014 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making 8
Capital Market Day (company specic, no conference) Percent
2
More than quarterly
0
Quarterly
2
Semi-annually
32
Annually
64
Less than annually
Enable meetings of current shareholders with
board members and/or top management Percent
49
More than quarterly
22
Quarterly
9
Semi-annually
8
Annually
12
Less than annually
Enable meetings of prospective shareholders with
board members and/or top management Percent
48
More than quarterly
26
Quarterly
8
Semi-annually
5
Annually
13
Less than annually
8. How much time do the following executives spend actively
managing shareholder base (days/quarter)?
CEO 4.2 days/quarter
CFO 6.4 days/quarter
9. How much time does the investor relations function spend
actively managing the shareholder base (days/quarter)?
31.3 days/quarter
Ideal Target/Shareholder Base
10. Describe your ideal or best possible composition of
your companys shareholder base versus your actual
shareholder base:
Ideal Actual Difference
Retail shares held in street name 5.8% 7.4% -1.6%
Retail shares held in personal name 3.7% 3.9% -0.2%
Passive Fund - Index 15.3% 14.6% 0.7%
Active Fund -Growth 25.0% 23.0% 2.0%
Active Fund - Value 16.9% 14.6% 2.3%
Hedge Fund; long/short positions 3.2% 8.4% -5.2%
Pension Fund Private 3.9% 1.4% 2.5%
Pension Fund Unions 1.6% 1.0% 0.6%
Pension Fund Public 3.6% 2.0% 1.6%
Activist Individual 0.0% 0.0% 0.0%
Activist Fund 0.0% 1.3% -1.3%
Top Management 6.1% 4.3% 1.8%
Directors of the company 3.2% 3.6% -0.4%
Employee stock ownership plan (ESOP) 3.1% 1.4% 1.7%
Other 2.7% 9.8% -7.1%
Unknown 6.1% 3.5% 2.6%
Note: The differences between Q4 and Q10 is due to different sample
sizes. For Q10, the sample size is smaller than for Q4. The Actual
column on Q10 only includes the rms that responded to the question of
the Ideal shareholder base.
2014 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making 9
11. To what extent do you agree with the following statements?
If the company attracted its ideal/target shareholder base:
Management would face less pressure to focus
on short-term results Percent
12
Strongly agree
46
Agree
24
Neither agree nor disagree
15
Disagree
3
Strongly disagree
Management could implement the companys strategy
more effectively Percent
6
Strongly agree
33
Agree
37
Neither agree nor disagree
19
Disagree
5
Strongly disagree
Management could make better investment decisions Percent
6
Strongly agree
24
Agree
42
Neither agree nor disagree
21
Disagree
7
Strongly disagree
Management could more easily pursue
value-enhancing strategic M&A transactions Percent
7
Strongly agree
24
Agree
46
Neither agree nor disagree
20
Disagree
4
Strongly disagree
Shareholders would provide higher quality feedback
on managements decision Percent
14
Strongly agree
34
Agree
38
Neither agree nor disagree
10
Disagree
4
Strongly disagree
Board would be able to focus on business rather
than appeasing certain shareholders Percent
8
Strongly agree
25
Agree
38
Neither agree nor disagree
22
Disagree
7
Strongly disagree
2014 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making 10
12. To what extent do you agree with the following statements?
The ideal/target shareholder for our company is characterized by:
Holding only long positions Percent
14
Strongly agree
48
Agree
18
Neither agree nor disagree
19
Disagree
2
Strongly disagree
Ownership not over 10% Percent
16
Strongly agree
48
Agree
23
Neither agree nor disagree
12
Disagree
1
Strongly disagree
Ownership not over 5% Percent
5
Strongly agree
24
Agree
36
Neither agree nor disagree
32
Disagree
4
Strongly disagree
Non-activist Percent
41
Strongly agree
46
Agree
11
Neither agree nor disagree
2
Disagree
0
Strongly disagree
Invested at a price below current price Percent
11
Strongly agree
46
Agree
37
Neither agree nor disagree
7
Disagree
1
Strongly disagree
Invested at a price close to current price Percent
0
Strongly agree
21
Agree
63
Neither agree nor disagree
15
Disagree
2
Strongly disagree
2014 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making 11
Long-term investment horizon Percent
51
Strongly agree
41
Agree
8
Neither agree nor disagree
0
Disagree
0
Strongly disagree
Medium-term investment horizon Percent
12
Strongly agree
69
Agree
18
Neither agree nor disagree
1
Disagree
0
Strongly disagree
Short-term investment horizon Percent
0
Strongly agree
8
Agree
22
Neither agree nor disagree
46
Disagree
24
Strongly disagree
Pursues investment strategy focused on growth Percent
15
Strongly agree
54
Agree
25
Neither agree nor disagree
6
Disagree
0
Strongly disagree
Pursues investment strategy focused on value Percent
7
Strongly agree
57
Agree
28
Neither agree nor disagree
8
Disagree
1
Strongly disagree
Has preference for increase in dividend payments Percent
6
Strongly agree
28
Agree
34
Neither agree nor disagree
22
Disagree
11
Strongly disagree
2014 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making 12
Votes consistently with management Percent
20
Strongly agree
37
Agree
37
Neither agree nor disagree
6
Disagree
0
Strongly disagree
Does not vote Percent
1
Strongly agree
3
Agree
33
Neither agree nor disagree
42
Disagree
20
Strongly disagree
Resides in a specic geographical location Percent
0
Strongly agree
7
Agree
37
Neither agree nor disagree
33
Disagree
23
Strongly disagree
Possesses substantial industry expertise Percent
6
Strongly agree
37
Agree
44
Neither agree nor disagree
9
Disagree
4
Strongly disagree
13. Do you expect that a change in your shareholder base toward
your ideal/target composition would have a positive impact
on your share price over the next two to three years?
Percent
80
Yes
20
No
14. Suppose you could change the composition of your
shareholder base such that the ownership of an ideal
investor as described above increases by 10% which of the
following benets would you expect to realize over the next
two to three years:
Increase in share price 15.4% increase
Decrease in volatility 19.6% decrease
Increase in trading volume 5.9% increase
2014 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making 13
15. Suppose a company in your industry has a shareholder base that is dominated by investors with short-term investment horizons.
To what extent to you agree with the following statements?
A company with a shareholder base that is dominated by investors with short-term investment horizons
Has reduced market value Percent
7
Strongly agree
34
Agree
40
Neither agree nor disagree
20
Disagree
0
Strongly disagree
Has reduced long-term growth Percent
6
Strongly agree
36
Agree
36
Neither agree nor disagree
22
Disagree
0
Strongly disagree
Cannot focus on strategic decisions because
of the focus on short-term success Percent
7
Strongly agree
58
Agree
21
Neither agree nor disagree
13
Disagree
0
Strongly disagree
Focuses on cost-cutting Percent
7
Strongly agree
44
Agree
36
Neither agree nor disagree
12
Disagree
1
Strongly disagree
Cannot effectively implement the companys strategy Percent
2
Strongly agree
37
Agree
40
Neither agree nor disagree
19
Disagree
2
Strongly disagree
Is restricted from making strategic acquisitions Percent
3
Strongly agree
22
Agree
45
Neither agree nor disagree
25
Disagree
4
Strongly disagree
2014 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making 14
Demographic Information
What is the annual budget for Investor Relations in your company
(excluding annual report costs and listing fees but including staff
salaries and benets as well as allocated overhead)?
$818,423 mean
$550,000 median
How many people work in Investor Relations in your company?
2 mean
2 median
How frequently do you use outside Investor Relation consultants?
Percent
23
On an ongoing basis
39
Occasionally
38
Never
What is the revenue for your company?
Percent
15
<$500 million
19
$500 million to $1 billion
39
$1 billion to $5 billion
12
$5 billion to $10 billion
9
$10 billion to $20 billion
7
>$20 billion
What is the industrial sector for your company?
Percent
2
Business Services
2
Chemicals
2
Commercial Banking
1
Commodities
2
Communications
7
Computer Services
9
Electronics
7
Energy
10
Financial Services (other than commercial banking)
4
Food and Tobacco
7
Industrial and Transportation Equipment
2
Insurance
2
Lumber and Paper
12
Other Manufacturing
8
Other Services
5
Retail Trade
2014 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making 15
What is the industrial sector for your company? (continued)
0
Transportation
3
Utilities
1
Wholesale Trade
13
Other
What is your gender?
Percent
61
Male
39
Female
What is your age?
Percent
3
<30
23
31 to 40
37
41 to 50
27
51 to 60
9
61 to 70
0
>70
How long have you been employed in investor relations?
Percent
7
Less than one year
10
1 2 years
8
3 4 years
11
5 6 years
12
7 10 years
21
11 15 years
19
16 20 years
11
20 30 years
1
31+ years
What is your title?
Percent
39
Vice President
12
Senior Vice President
1
Executive Vice President
31
Director
9
Manager
7
Other
2014 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making 16
Methodology
Results are based on the survey of 138 investor relations professionals conducted between February and March 2014.
2014 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making 17
About the Authors
Anne Beyer
Anne Beyer is an Associate Professor of
Accounting at the Stanford Graduate
School of Business and former Michelle
R. Clayman Faculty Scholar. Annes
research interest is in the area of nancial
accounting with a focus on corporate
disclosure, capital market prices, and
corporate governance. Her recent work
has examined the properties of analyst
and management earnings forecasts as
well as investors reaction to different kinds of corporate disclosures.
Email: abeyer@stanford.edu
David F. Larcker
David F. Larcker is James Irvin Miller
Professor of Accounting at the Graduate
School of Business of Stanford University;
director of the Corporate Governance
Research Initiative; and senior faculty at
the Arthur and Toni Rembe Rock Center
for Corporate Governance. His research
focuses on executive compensation and
corporate governance. Professor Larcker
presently serves on the Board of Trustees
for Wells Fargo Advantage Funds. He is co-author of the books
A Real Look at Real World Corporate Governance and Corporate
Governance Matters.
Email: dlarcker@stanford.edu
Brian Tayan
Brian Tayan is a member of the Corporate
Governance Research Initiative at the
Stanford Graduate School of Business.
He has written broadly on the subject of
corporate governance, including the
boards of directors, succession planning,
compensation, nancial accounting, and
shareholder relations. He is co-author
with David Larcker of the books A Real
Look at Real World Corporate Governance
and Corporate Governance Matters.
Email: btayan@stanford.edu
Acknowledgements
The authors would like to thank Matt D. Brusch, Ariel A. Finno,
and Michelle E. Gutman for assistance in the preparation of this
study.
2014 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making 18
About NIRI and the Rock Center
About the National Investor Relations Institute
Founded in 1969, the National Investor Relations Institute (NIRI)
is the professional association of corporate ofcers and investor
relations consultants responsible for communication among
corporate management, shareholders, securities analysts and
other nancial community constituents. The largest professional
investor relations association in the world, NIRIs more than
3,300 members represent over 1,600 publicly held companies
and $9 trillion in stock market capitalization.
www.niri.org
About The Rock Center for Corporate Governance
The Arthur and Toni Rembe Rock Center for Corporate
Governance is a joint initiative of Stanford Law School and the
Graduate School of Business at Stanford University. The Center
was created to advance the understanding and practice of
corporate governance in a cross-disciplinary environment where
leading academics, business leaders, policy makers, practitioners
and regulators can meet and work together.
www.rockcenter.law.stanford.edu
Contact Information
For more information on this report, please contact:
Katie Pandes
Assistant Communications Director
Stanford Graduate School of Business
Knight Management Center
Stanford University
655 Knight Way
Stanford, CA 94305-7298
Phone: 650.724.9152
Email: kpandes@stanford.edu
Ariel A. Finno
Director-Research
National Investor Relations Institute
225 Reinekers Lane
Alexandria, VA 22314
Phone: 703.562.7678
Email: anno@niri.org
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Corporate Decision-Making