The Value of Engaged Investors

The Value of Engaged Investors

I have long felt that many private companies’ attitudes, outlook and values are at the forefront of a national discussion on the purpose of a company. As CEOs on the Business Roundtable, politicians and academics begin to re-examine the character and purpose of public companies, the characteristics they are now holding up to emulate are those that many private companies have exhibited for decades. These attributes include a long-term focus, support of multiple stakeholders — employees, customers and their communities, in addition to shareholders — the creation of a values-driven culture and the recognition and acceptance of ESG responsibilities.

One reason many private companies may be ahead of the curve is their relationship with their shareholders. In an interview at our Private Company Governance Summit held earlier this year, and featured in this issue of Private Company Director, Robert Jackson, a commissioner of the SEC, noted that a significant advantage of private companies is that their boards “are close[r] to their investors.” This close relationship can be a prerequisite for many of the “model” characteristics noted above.

Engaged shareholders who have a deep understanding of the company, its employees, its customers and its suppliers can add tremendous value. Private company shareholders frequently think more like long-term owners, as opposed to certain public market investors who are betting on the company’s stock performance and generally focus on short-term results. Thus, private company shareholders can empower a board to take a longer-term view as well as provide cover and support for decisions when necessary. Moreover, in closely held companies, shared values among a smaller ownership group can be perpetuated and diffused throughout the organization more easily. As Jackson notes, this is difficult to do in public companies, where “investors change every day” and may not closely identify with the company, as private company shareholders often do.  

For private company boards, the challenge with maintaining a close relationship with a smaller number of engaged shareholders can be deciding what information is necessary to provide, how much, how often and in what fashion. Private equity-backed businesses generally have these questions answered, because their representatives usually sit on the board. However, for private companies without a financial sponsor and a more diffused shareholder roster, these basic questions can be frequently compounded by minority shareholders who do not understand the different roles of management, of the board and of a shareholder.

Family Business Magazine, a sister publication of Private Company Director, has highlighted family businesses that survey family shareholders to better understand their concerns. Many family firms spend significant time educating shareholders about what their role entails (and, perhaps more importantly, what it doesn’t entail). Some of the most savvy family businesses form family councils to address shareholder issues that are separate from the governance of the business.

It’s all part of what keeps private companies a step ahead on the “purpose” journey. Owners, directors and executives of many private firms already have the fundamental commitment the Business Roundtable now includes on its list of priorities.