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Shareholder Involvement in Times of COVID-19
by Professor Josep Tàpies
The above-mentioned title invites us to reflect on what we understand the terms “shareholder” and “investor” to mean. And we could even go a little further and delve into what the term “owner” means as well.
The shareholder
In the legal realm, when we talk about shareholders, we are referring to those natural or legal persons who own one or more shares of a company. This gives these individuals rights that are clearly defined in corporate law.
The financial literature generally refers to shareholders as those natural or legal persons who only are looking for compensatory returns for the risks incurred in investing in shares rather than other financial assets.
Both views are clearly over simplifications which probably stem from the need to be able to “fit” the concept of shareholder into financial models, making it something mathematically interpretable.
The investor
An investor is a person who, by buying shares, invests their money in a project that they know well, and from which, in doing so, they expect a certain return.
The owner
An owner is the shareholder who, having invested money in a project he or she knows well, considers it to be his or her own. Owners care about the purpose of the project they’ve invested in. They believe in the very nature of it (its values) and share the same long-term ambition for it (or vision) as the board of directors, the senior management team, and the rest of the shareholders.
Oftentimes, when speaking of owners, people confuse the idea with absolute owners of companies who look on the company as a personal asset they can do with as they please. Nothing is further from the idea of ownership that we’re describing here. Our notion of ownership understands the shareholder in question to be emotionally invested in the company, they feel it is truly theirs; they are part of it. Because of this sentiment, the term “emotional property” is often used in relation to owners. They are those shareholders who, in addition to expecting financial returns, want to support the company in its long-term aspirations.
COVID-19, shareholders, investors, and owners
If our shareholders were only financially-invested shareholders, perhaps they’ve abandoned our shareholdings in a panic to seek refuge in other financial assets with lower levels of risk. If, on the contrary, they personally believe in the project, we have to get them involved or, at the very least, keep them promptly informed on the outcomes and consequences of the tactical and strategic decisions made to overcome the COVID-19 situation and where the company will come out after weathering the storm.
When it comes to deciding what to do in the face of this new situation created by the COVID-19 pandemic, the board of directors must focus on two things: survival and adapting to these new circumstances.
Survival
During tough times, we have to pay particular attention to two key variables for the survival of our companies: cashflow and our concept of the company.
When it comes to cashflow, the board of directors will most likely have already dealt with the situation, since without cashflow, survival is impossible. However, when it comes to making decisions to generate or maintain cashflow, we can’t lose sight of our concept of the company, which, for us, is structured around four communities of people:
-customers/clients for whom the company meets a real need;
-employees, whom the company develops personally and professionally;
-stakeholders, who are key partners for the company’s sustainability; and
-shareholders, who must be remunerated fairly, and whose collaboration is asked for especially in turbulent times.
Company sustainability
This is the second variable we need to focus our attention on. Review the fundamental aspects of your company to see if it makes sense to maintain how things were done pre-COVID-19. Or if, to the contrary, it is time to rethink things because our clients’ needs have changed.
It is also essential that we examine our long-term ambition, our vision. COVID-19 may compel us to rethink it. If this proves to be the case, you have to ask yourself: Can I count on my shareholders for this? Or, to put it more frankly: Do I have the right shareholders?
Involvement
In especially trying circumstances such as those brought on by the pandemic, it is crucial we know whether our company has shareholders with an exclusively financial vision, if it has investors who intend to stick around, or if the company has proprietary shareholders.
If we don’t know our shareholders’ typology and their expectations, coming up with a successful strategy to get them involved will be extremely difficult.
Answering the question of whether your company has the right shareholders and acting accordingly should be an ongoing task, which requires early differential diagnosis, calm and constructive dialogue, and determination. After avoiding bankruptcy and ensuring the best possible CEO succession when the times comes, this is likely the third top responsibility of the board.
The opportunities and circumstances that present themselves to a given company may not always be convenient for all its shareholders. The opportunity criteria for all shareholders is a field for corporate development. The opportunities that will be taken or rejected by them should be foreseeable.
Gaging this does not require a detailed strategy plan, but rather a corporate framework sufficiently outlined and debated by the board over time.
It isn’t a question that can be improvised.
Josep Tàpies
Professor of Strategic Management
IESE Center for Corporate Governance
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