"In order to achieve the right match, a company needs to understand the added value that the shareholder in question can offer. Such a contribution should be more than just an injection of capital and can take various forms, i.e. involvement, an innovative idea, knowledge, a network, clientele, technology ... or synergy, new markets or management insights," Philippe Craninx, Managing Partner Corporate Finance at Moore Belgium, the accountancy and consulting services provider, explained.
Matching the right shareholders to the right companies at the right time is not a matter of trial and error. By classifying both parties, Craninx creates a decisive framework.
Different types of shareholders
There is an old Flemish joke that says: the first generation starts the business, the second builds it up and the third squanders the capital and switches the lights off. Craninx: "This classification reflects the different types of shareholders. In many cases the founder is the intuitive entrepreneur-shareholder. The second generation has grown up with the company and accumulated knowledge to grow the business. They usually also acquire specific training, both within and outside the company. The third generation in this scenario lacks the discipline of its predecessors. Of course, this witticism is much too short-sighted and often unjustified, but it clearly expresses the received wisdom that there are different types of shareholders."
One way of distinguishing between shareholders is to classify them into three types: the family shareholder, the manager shareholder and the financial shareholder. Craninx: "The family shareholder feels part of the company and spent time on the shop floor or in the workshop as a child, so to speak. The bond is personal - often emotional - and transcends the purely commercial. For the family shareholder, the company is - once again another Flemish pun - their baby. In an ideal world, the 'body' and 'head' are synchronous. Manager-shareholders have not grown up with the company since childhood, but acquire shares as part of their professional development, often via a management buy-in or buy-out. Their bond is based on this professional background, sometimes sector-specific and sometimes based on a specific talent. Their link with the company is less historical and their focus more industrial. Finally, financial shareholders look at a company as an investment decision, in which they may want to take an active role but focus primarily on the creation of shareholder value."
Craninx also uses additional categories to classify shareholders. "I often make a distinction between intuitive and rational shareholders. This is not a contradictory black-and-white narrative. Someone who acts intuitively is not irrational - and vice versa, someone who runs a business rationally is not without feeling. Nevertheless, the distinction helps to create clarity. Sometimes people make decisions that are incomprehensible at first sight and may seem impulsive. That is because a lot of intuitive or experience-related knowledge can soon lead to a conclusion. An intuitive shareholder looks for credibility, trust, a coherent narrative during their decision-making process. A rational shareholder on the other hand carefully weighs the pros and cons and never makes hasty decisions. Again, these are the two extremes. Most good decisions are made through a combination of intuition and reason - by seeking advice, taking note of considerations and thinking in unison. Intuitive shareholders often take more or fewer risks than rational shareholders, depending on their age and/or experience. The larger the structure, the more important reasoning becomes. The more turbulent the environment, the more important intuition becomes.”
Company life cycles
Companies require the right type of shareholder depending upon which phase of their life cycle they are in. Craninx: "A start-up company needs someone who is driven by their ideas, is focused on the core business and is prepared to make sacrifices in order to be successful. In a start-up the shareholder and manager should be the same person. However, despite this drive, start-up entrepreneurs often reach a ceiling once their business gets to a certain size."
"If a start-up entrepreneur wants to remain successful during their company’s growth phase, they must surround themselves with people who will shape its structure. At that point, a core group of complementary, often extremely loyal, people with a high degree of solidarity emerges within the company and promotes its growth. The quality and strength of the structures determine the level of growth. As a result, the balance shifts from the entrepreneur to the manager and the bond between management and shareholders may loosen. Not always the case but can happen. In large, listed companies the structure is even more important than the shareholding. Capital and management become separate entities.”
"Additional dimensions in a company’s life cycle include economies of scale, internationalization, etc. In short, the evolution of the sector, which helps to determine the company’s future ... and which type of shareholders will form its backbone. A typical example relates to developments in the retail sector. In days gone by the village grocer used to sell all kinds of products. The owner was the manager, together with his wife and sometimes their children. The advent of department stores that purchased internationally and organised large sales outlets with many staff led to the demise of local grocers and to the creation of chain stores with their own specific logic, management and shareholder structures. Nowadays the pendulum is swinging back and smaller, specialist niche players are emerging, where craftsmanship and product knowledge take precedence over purchasing power and standardisation. Again with shopkeepers who are their own shareholders, coinciding with the intermediate form of franchise concepts where chains (and their own shareholders) accommodate certain aspects, and local shops are organised by their owner-operators.”
Role of an (independent) director
These developments highlight that the role of director becomes more important as the link between shareholders and the company loosens. Directors can fulfil an important bridging role in the transition between the different types of shareholders. Craninx: "This bridging function can go both ways. To the extent that a historical shareholder hands over the running of the business to a non-family management, family directors can maintain the link between past and present, between reason and intuition, between management and shareholder. And vice versa, family-run companies can benefit from independent directors who bring in knowledge, networks and other assets that the family lacks but which the company needs.”
Conclusion
"Throughout these developments shareholders have to ask themselves: 'Am I the right shareholder for my company right now?' The answer may well be contentious, because a shareholder has to be prepared to leave when their time comes. Not too early and not too late. Finally, there is another important question: does the board of directors - complementary to its shareholding –possess the knowledge and competence that the company needs during its current life cycle phase?"
Moore Corporate Finance is able to bridge the gap between a strong local presence and global execution power, thanks to the integrated network of worldwide expertise within Moore Global Corporate Finance.
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