“If this world were mine, I’d make you a king … With wealth untold, you could have anything.”
— from “If This World Were Mine,” as recorded by Marvin Gaye
Does a corporate structure where long term decisions are made by millions of fickle shareholders sound like a recipe for success? Strange as it may seem, most of the time it is. Many companies run by large, disparate groups of stockholders where no single investor owns more than 1 percent of the shares have been successful for many decades.
But what about the flip side, when the wisdom of the crowd (or shareholders) can be shortsighted, uninformed or misguided? What about when minority shareholders don’t maintain the same long-term focus that multi-generational family companies do?
One example? Paying out dividends. Short-term shareholders “renting” a stock may want the company to pay out every penny possible as a dividend while investing nothing in the brand’s future. But folks interested in the company’s long-term success typically don’t gut tomorrow’s paycheck to increase today’s temporary payout.
Some stock indices are currently changing their rules to exclude companies with non-voting share classes of stock that limit shareholder rights. By having tiered share classes, companies can raise funds from the public to expand their business while simultaneously limiting those investors’ say in the direction of the company. This is how many family-controlled, publicly traded companies operate.
While many investors shun companies run by the founder or their family, it shouldn’t be a deal breaker for the average shareholder. At their core, family-controlled companies are driven by self-preservation and long term profits. Folks whose entire fortunes are tied up in a business they still control through owning voting shares can often be trusted to do what’s best for them and their families over the long term. Non-voting shareholders can be rewarded all the same, because the folks running the show desire the same outcome, which is a higher long-term stock price.
Investing in a business without a voice may sound like a leap of faith, and in some ways it is. But companies who structure their stock with multiple share classes are often intentionally retaining long term decision making authority with either the company founder or their heirs. A major concern associated with investing in a family-controlled company is that the founder may become incapable of wise decision-making or that a spoiled heir takes over and runs the business aground. It happens. But more often than not, the folks running family-controlled companies’ incentives are largely aligned with ours (they make money when the stock price goes up just like we do). In other words, investing in those who invest in themselves can be a winning formula over time.
Margaret R. McDowell, ChFC®, AIF®, author of the syndicated economic column “Arbor Outlook,” is the founder of Arbor Wealth Management, LLC, (850.608.6121 – www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin.