The one thing many top-performing companies have in common is they are shareholder-friendly. That stands to reason because it’s always a mutually beneficial relationship. The boards of directors and senior management of these companies look out for their shareholders’ interests, often choosing to return profits to shareholders in the form of cash dividends, stock buybacks, and special dividends.
The shareholders reciprocate by holding on to their shares, reinvesting their dividends in additional shares, or pouring more equity into the company by purchasing more shares and voting to keep board members in place. To company leadership, increasing shareholder value can translate directly to increased market value.
Shareholder Interests are Top-of-Mind with Shareholder-Friendly Companies
While paying dividends or repurchasing stock are clearly transparent acts of good stewardship, it’s what you don’t often see or hear that are the authentic marks of a genuine shareholder-friendly company. For example, top-performing companies know what they need to run the business profitably. They know what they need to pursue the right opportunities. They also know the limits of their ongoing operations and opportunities so that, when they reach those limits, and there’s still cash flow available, they return it to the shareholders.
Less shareholder-friendly companies instead turn inward, often hoarding their cash flow, or worse, wasting it on misguided and risky endeavors. You’ll often see these companies using their cash flow to buy other companies that are misaligned or building out parts of the business mired in low-profit margins. It’s not uncommon for a company to spend cash flow on expanding the business to justify bigger paychecks or bonuses for senior management.
That’s in stark contrast to top shareholder-friendly companies that demonstrate their loyalty to shareholders by paying increasing dividends each quarter. One of the companies we own earned a significant profit last year, which they could have retained or spent as they wished. Instead, they paid out a substantial special dividend on top of their regular dividend payment. Why would they do that? Because management knows their business. They know what opportunities should be seized, and they know the limits of how they should use their profits. That’s the epitome of “shareholder-friendly.”
Shareholder-Friendly Companies are Honest with Shareholders
But there’s more to being a shareholder-friendly company than being a good steward of the equity shareholders bestow upon them. Shareholder-friendly companies know how to communicate with their shareholders. They treat shareholders as a true partner, telling them what they need to know about their operations, including the good, the bad, and the ugly. It speaks to the company’s culture that’s based on honesty and integrity.
You’d like to think that all companies want their shareholders to know what is going on. However, in our experience, that is not the reality. Even companies that strive to enhance shareholder performance can’t be shareholder-friendly if management can’t or won’t speak with absolute candor.
Out of fear of upsetting their shareholders, they gloss over bad news or try to smooth the edges where the sharpness is apparent. They talk like politicians, giving nuanced answers and telling shareholders what they want to hear. Rather than own up to a mistake, they try to pass the buck or cover their behinds for the sake of keeping their positions while keeping shareholders in the dark.
How to Know if You’re Listening to a Shareholder-Friendly CEO
Out of all the criteria we use to identify and select high-quality companies for our portfolio, the “candor test” is the most critical. We look for it in company reports, and we listen for it on shareholder conference calls. You can tell who the straight shooters are—which ones treat their shareholders as grownups, as partners. Their demeanor is direct, almost casual, sometimes brutally forthcoming with the truth. You get the feeling you’re listening to the CEO while sitting around his backyard grill.
That’s why I find Warren Buffett’s letter to shareholders so refreshing. In almost every letter, you can find some instance of self-deprecating admission of guilt over a mistake he made. It’s remarkable how one of the best investors in history so freely admits to his mistakes. But, you also know that he learns from them. That level of honesty is unusual in corporate America, but it’s out there if you look for it.
Contrast that with CEOs who sound like they’re reading from a carefully crafted script prepared by the marketing department. Any person of average intelligence with a B.S. meter can spot it, much like you can with a politician you know is feeding you lines with polish and flair.
It’s great to own shares in a company that’s performing well. But stuff happens. Mistakes are made. And sometimes the winds change. If a company isn’t forthcoming and telling you like it is, it’s not shareholder-friendly. Better to cut any potential losses and look for one that is.