Charlotte Aguilar-Millan asks if companies of the future need shareholders in her seventh blog post for our Emerging Fellows program. The views expressed are those of the author and not necessarily those of the APF or its other members.
Shareholders are typically those who have made an investment into a company. This entitles them to a return. They also are entitled to vote on matters such as the composition of the Directors for the company. However, Shareholders have little control over how the Directors run the company.
When the views of the Shareholders and the governance of Directors do not coincide, this can lead to Shareholder frustration. This frustration can result in Shareholder protests or even the disposal of their investments. This result for the company can lead to bad press which can have a snowball effect, leading the company to fall out of favour with shareholders. The market saw this with Woodford’s fund in 2019. The fund had become loss making, impervious to shareholder comment, on which the media then commented, leading to a mass sell off in the market. This resulted the fund being suspended.
The investment landscape is changing for companies seeking finance. There is a diminishing need for companies to seek equity or debt finance. This can provide an avenue for Companies to gain funding without the risk of Shareholder protests or mass share disposal. The therefore question arises, do companies of the future need shareholders?
One growing investment landscape is online crowdfunding. It is projected that by 2025 the crowdfunding industry will have raised over $300 billion. The vast majority of this is in the form of a contribution rather than in return for equity. It means that companies are able to raise finance without having shareholders entitled to vote on company operations. Platforms such as GoFundMe and Kickstarter are helping smaller companies grow through donations rather than taking on debt or new shareholders (equity). It is starting to disrupt traditional means. It enables smaller companies to have more control over their operations and direction of growth.
The UK government demonstrated their support of alternative financing by introducing the Innovative Finance ISA in 2016. This enables the UK retail investor to invest directly into unlisted companies seeking finance through alternative means. The retail investor generates a tax-free return on their investment. While the company maintains autonomous control.
This does have an effect on public trust. Unlisted companies need to meet fewer legal regulations and are not required to be as transparent as listed companies. How can the public trust a company where they cannot cast a vote but can only observe the operations? The only regulation some unlisted companies will be subject to is a financial audit. However, trust in financial audits has been declining at a significant rate. Almost all audit firms have now been fined for inadequate audits. Yet, most Partners involved remain in the industry. The public no longer can trust fully that a company with a ‘clean’ audited opinion can be sufficiently trustworthy to invest in.
This is leading to Boards preferring to de-list and no longer suffer public scrutiny. Shareholders also are shying away from holding shares directly. Instead, they hold them through an intermediary such a fund. Shareholders simply cannot rely on the provided information of an individual company. The rise private equity investment has seen a significant global increase in the past 5 years.
This process is likely to continue into the future as public shareholdings are replaced by private equity. Boards will want to avoid public scrutiny by taking the company private and shareholders will want to invest privately through private equity. The future investor will use private equity as a vehicle in which to place trust. It is likely that the need for companies to have individual shareholders will diminish. This will result in the company of the future having fewer, but larger institutional, shareholders.
© Charlotte Aguilar-Millan 2019