There has been a plethora of debate and commentary on the benefits and disadvantages of differing shareholder bases. As large multinationals increasingly outline their reasons behind going public (or not), debate has been stirred over the merits of having numerous shareholders. Modern corporations seem to be favouring the dispersal and variety of shareholders attained – but why is this the case? Below, we seek to illuminate the impacts and benefits of a broad shareholder base for companies.
1. Future funding
For early-stage companies, setting yourself up for future funding rounds is crucial. Those companies hoping to eventually ‘go public’ need to be mindful of the requirements for a listing on a public stock exchange. In order to ensure sufficient trading liquidity, many stock exchanges around the world impose minimum shareholder numbers for a listing. In Finland, for example, the OMX’s smaller exchange, First North, requires companies to have at least 300 shareholders, or 100 with market-making services, to be eligible to list. Companies’ growth ambitions may be stymied if their shareholder base is too limited.
For companies of all sizes, when it comes to capital raising, often your existing investors are the best source of funds. The more diverse your shareholder base, the more investors you have at your disposal. Many investors who are keen to avoid having their stake diluted will be eager to participate in future funding, contributing further capital and supporting your business.
2. Reciprocal benefits
While shareholders benefit from a greater corporate democracy, the companies are able to benefit from the loyalty and volatility-averse abilities of retail investors. This loyalty translates in showcasing the company to a broader market, as having a broad base of shareholders works as its own marketing tool, providing a regular, unassailable valuation of the company. The marketability of the company’s shares then allows the company to have an increasingly diverse investment portfolio.
3. A more democratic approach to decision-making
“Shareholder bases are becoming more diversified… [mutual funds] are starting to lose power as money flows to exchange-traded funds” – Lou Cordone, head of advisory services at Thomson Reuters
The increased diversification of shareholder bases, at least at first glance, seem largely to be a natural win for retail investors. Simply, a broad range of shareholders holds managers of funds more accountable, which has become the key quandary of modern corporate finance.
The financial sector is rife with commentators who speculate on modern corporations increasingly favouring having dispersed shareholders and a clear delineation between ownership and management. The impact of a shareholder base on on payout policy and corporate decisions is varied and decisive. Companies with a broad and diverse base of shareholders, allow greater democracy and flexibility.
4. Personal and personnel perspective
The levels of corporate social responsibility and transparency within management positions in companies are of large public interest and scrutiny. The appeal of a company with a broad, public shareholder base is not limited just to its executive and management levels – it also appeals to prospective employees. The company’s reputation as having a large range of investors is brilliant for brand awareness.
Ultimately, there are many direct links between shareholder base size and overall health – be it financial, from an employee, or from a management perspective, of the company. By obtaining funds that do not have to be repaid, by accessing increased prestige and viability, and having a more diversified portfolio, executives have much to gain from a broader shareholder base. With transparency and democracy becoming the most valuable ideals of companies in the 21st century, the benefits are not only financial but moral also.
Expanding your shareholder base is one of the core benefits of using equity crowdfunding. Read more on how you can utilise crowdfunding.