read 'Money Talks' in the Rumpus Room
Richard Nathan, April 1996
Barrister and Solicitor, Osler, Hoskin & Harcourt, Toronto
In the future, major public companies will talk directly to their shareholders, and their shareholders will talk back to them. Every day. Directors and members of senior management will review and participate in these discussions in considering their positions on major issues facing the company.
New information technologies, such as the Internet and the SEDAR database of public company disclosure, will significantly reshape the ways that companies interact with investors. These new technologies will change the environment for corporate information in a way that dramatically accelerates fundamental trends which have been transforming corporate governance and investor relations for over a decade.
During the 1980's, investors began contributing significant investment dollars to mutual funds and pension funds. These institutional investors became very large, frequently acquiring significant ownership positions in major public companies. In many cases, it became impossible for these investors to sell shares of underperforming companies, either because their substantial holdings could not be liquidated without causing a steep drop in stock price or because of a lack of substitute investment choices for fund managers seeking to track a defined stock index, geographical region or industry group. Institutional investors seeking to improve stock prices of what they identified as underperforming companies began to assert their powers as major shareholders more aggressively.
Fund managers began to demand more timely and more detailed corporate information. Many companies responded by arranging meetings between major shareholders and senior management. Others developed a practice of holding press conferences by conference call to tens (or even hundreds) of analysts and investors in response to corporate developments. The amount and timeliness of corporate disclosure provided to the marketplace -- "information liquidity" -- increased significantly, and large shareholders with the resources to monitor the information flow became more powerful. Institutional investors began to target specific underperforming companies for change and, frequently through the responsive efforts of more active independent directors, achieved significant changes.
Today, investor relations is a high priority for many public companies. It is now common to see a steady stream of press releases keeping shareholders up-to-date on business developments. Analysts are in regular contact with company management to stay current on their reports to investors. Stock exchanges now require listed companies to provide comprehensive disclosure of all director relationships and corporate governance practices. The shift in power can be seen in the policy statements now issued by major institutional shareholders (and their representatives) setting out the types of corporate behaviour they are prepared to support. Directors are being held increasingly accountable for corporate failures and those who do not take their positions seriously act at their peril.
The trend is clear: as information liquidity increases, shareholders become more powerful and companies are forced to respond.
The best example of this effect arises in the course of a significant transaction such as a contested takeover bid where information liquidity is at its highest: (i) detailed and immediate disclosure of all developments is required by law, (ii) share ownership becomes concentrated in the hands of sophisticated investors who scrutinize every move, (iii) shareholder value generally becomes the more immediate focus of board decisions, and (iv) stock prices react instantly to every new development. Obviously, pricing decisions move the market in a takeover bid, however, the market moves more quickly because more shareholders have better information sooner. Similar effects can be seen in non-cash transactions, such as proxy contests, where information liquidity also rises.
The combination of these technologies will provide companies and investors with major new resources:
From the companies' point of view, a new window to their shareholders will emerge for managing the delivery of all kinds of corporate news. Management and directors will be able to take the "pulse" of their shareholders more frequently and with greater accuracy. It is possible that directors will assess shareholder preferences in a manner similar to the way that politicians currently react to opinion polls, and even use these tools to assess support for certain types of corporate decisions in advance.
Companies that deliver the most compelling messages to their shareholders and the investment community will clearly have a competitive advantage in the information driven capital markets. In the longer term, universal access to interactive corporate forums could lead to legislative changes permitting new initiatives such as on-line shareholder voting.
The momentum driving these developments will continue to increase as each new technology becomes more widely available. It is impossible to predict precisely when their cumulative impact will make this brave new corporate world a reality. However, it can be confidently predicted that the day will arrive sooner than most companies expect.
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