After a busy earnings season, it can be easy to get bogged down by a swamp of numbers. But there are things investors should think about that go beyond the income statement and balance sheet (yes, really).
Elon Musk took over Twitter a year ago – a move that set stock markets and the media alight. This anniversary reminds us to take stock of company ownership when it comes to your investments.
There are multiple ownership structures when it comes to listed companies and it’s an important consideration before deciding to invest.
Increased share ownership usually means more control over the way the company is run. It means these shareholders have more voting rights than other shareholders.
Here we’ll take a whistle-stop tour of different ownership scenarios, and what they could mean for investors.
This article isn’t personal advice. If you’re not sure what’s right for your circumstances, seek advice. All investments and any income they produce can fall as well as rise in value, so you could get back less than you invest. Past performance is not a guide to the future.
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Founders and CEOs as majority shareholders
This is more common than you think. The likes of Fraser Group’s Mike Ashley and family, or JD Wetherspoons’ Tim Martin are prime examples in the UK market. This scenario is when the person that set up the business is its single biggest shareholder.
In a lot of these cases, that individual is also the CEO. So, there’s an extra layer of corporate oversight controlled by one person.
There are benefits to this model. This type of shareholder is, in general, more invested in running the business for the long term. They’ll care even more about the company doing well and are less pressured to achieve short-term success to please markets.
When increased voting power is in the hands of the company’s founder, it can mean bolder decisions than if a wider pool of more neutral parties are pulling the strings. Strategically, this can mean faster decisions and there are traditionally benefits for companies willing to grasp the nettle.
The flipside of this is that it can be difficult for other investors to go against the CEO’s decisions, even if they hold a large proportion of voting rights through their shares. This can be challenging if the company is going in a strategic direction others disagree with, and there’s not too much that can be done about it.
Founder/majority shareholders are often synonymous with the brand too. Outspoken and bold individuals can be the very thing that draws investors in.
This is all well and good, but it does mean the stock market reaction can be severe when it’s time for that person to step down. Or a PR blunder can have a disproportionate response to the company’s valuation when compared to your run-of-the-mill CEO.
What about family ownership?
This one is very closely related to the founder scenario, but simply means multiple members of one family, rather than an individual, own most of the shares.
This is the case at luxury fashion powerhouse, LVMH. CEO Bernard Arnault – who’s had the job for nearly half a century – and his family own over 48% of the shares.
We’re very supportive of listed companies with family ownership structures. This is because there’s even more motivation to protect the company for the long term, so a strong business and well-supported share price can be passed onto the next generation.
If a company is your family’s crown jewel, head-hunters are less likely to be able to prize you away too, which reduces disruption to the investment case when it comes to succession in the top job.
The best kind of governance is when investors’ and management’s outcomes and priorities are aligned. This is more likely to be the case when there’s significant family ownership.
Outsiders taking on large amounts of shares
This is what’s known as building a stake in a company. And there can be a couple of reasons an individual, or company will do this.
One possibility is a takeover offer. This is exactly what Elon Musk did. It wasn’t too much of a surprise after he’d refused a seat on Twitter’s board, which suggested a takeover bid could be on the horizon.
In the UK, if someone acquires 30% or more of another company’s voting rights, then they have to make an offer for the target company.
The other reason an investor might build up their shareholding is to try and influence how the company is run. Like we mentioned earlier, if an individual has a large chunk of voting rights, they wield more power. That can include what will or won’t get voted through when it comes to changes at the company, and even who’s elected to the board.
The other thing to keep in mind is, the market had a strong reaction to Musk’s stake-building before any takeover was imminent. It sent Twitter’s valuation soaring. The market puts a lot of weight on who owns a large number of shares – it really does matter to the outlook of a company.
Recent examples serve as a perfect reminder for investors to keep up to date with the ownership structure of companies they own. These can change quickly and have a real impact on how a business is run and how their shares potentially perform.
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