Who Needs Shareholders?

The current issue of Harvard Business Review article* by Justin Fox and Jay Lorsch of Harvard are arguing the importance of the individual shareholder in the wake of the trend of institutional shareholders now comprising more than 50% of stock ownership. With Facebook’s Zuckerberg doing an end run around the individual shareholders, he owns controlling interest in Facebook.

In 1950, individual shareholders controlled about 90% of a company’s stock. Today, they control less than 40%, with institutions controlling the rest.

According to Fox and Lorsch, in the modern corporation, the role of outside shareholders is to provide money, information, and discipline. In recent years they’ve done poorly on all three fronts.

Short term trading gives rise to volatility and there is so much smoke around market prices that the signals that are supposed to be sent are difficult to read. While shareholders are becoming more vocal and have more clout, managers are still lining their own pockets and taking steps that destroy value. Someone needs to perform the tasks that shareholders haven’t been able to perform.

While shareholders are more vocal, especially regarding CEO pay and performance, they are not knowledgeable about what a good pay package is, so CEO pay is still going up in the wake of poor performance. And, for whatever reason, shareholders don’t seem to care.

How should directors think about their strategy to keep this from happening? Email me with your ideas.

*Who Needs Shareholders?. Harvard Business Review. Jul/Aug2012, Vol. 90 Issue 7/8, p14-14. 1p.