GW Law Faculty Publications & Other Works

Document Type

Article

Publication Date

2020

Status

Accepted

Abstract

Special Note: This Article is part of The Quality Shareholder Initiative at the Center for Law, Economics and Finance (C-LEAF), at The George Washington University Law School, Prof. Lawrence A. Cunningham, Faculty Director. Considerable effort goes into forging tools a corporation can use to shape its shareholder base. Much effort is geared toward promoting long investor time horizons, presumed to be a valuable but rare appetite among many shareholders. Less attention has been focused on promoting greater commitment, though attracting shareholders willing to stake large percentages of their portfolio in a given company’s stock may prove way more valuable than having numerous large index funds on the shareholder list.

In three ways, this article adds to the toolkit on shareholder cultivation. First, this article stresses that a shareholder’s relative portfolio concentration in a particular company’s stock is as important as average holding periods. Such an orientation is unusual in corporate life. But today’s world is dominated by index fund investors whose portfolio diversification limits their ability to act as informed shareholders. A focus on relative portfolio concentration is therefore becoming critical.

Second, this discussion introduces, and is motivated by, new evidence showing a correlation between a high density of such shareholders and superior corporate performance. In fact, shareholders exhibiting both traits—patience and conviction—have long been cultivated by an elite group of companies whose long-term performance has benefited. The most famous is Warren Buffett’s Berkshire Hathaway and there are scores of other less famous but equally accomplished.

Third, focusing on such quality shareholders, as Buffett long ago dubbed them, this article offers numerous tools a corporation may use to achieve a shareholder base with a high density of quality shareholders. These include communications strategies, such as stressing long-term performance metrics in corporate disclosure, and substantive practices, such as prioritizing the art of capital allocation. Managers and quality shareholders themselves are the target audience.

GW Paper Series

2020-60

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