Investment Horizon of Shareholders
The investment horizon of shareholders is an important factor that companies should consider when engaging with investors. It can be defined as “the total length of time that an investor expects to hold a security or a portfolio” (Chen, 2020, para. 1). Specifically, there are short-term and long-term shareholders who invest for different purposes. Thus, short-term investors or speculators have a short investment horizon and expect short-term earnings (“Engagement Management by Company,” 2022). Meanwhile, long-term shareholders hold the portfolio for a longer period of time with the purpose of long-term earnings from the investment (“Engagement Management by Company,” 2022). According to Chen (2020), shareholders with short-term portfolios are characterized as willing to take fewer risks with their investments. Thus, business ventures should take into account the investment horizon of their shareholders when engaging with them.
Investment Selection Criteria by Long-term Investors
Persons interested in investing in a company long-term should consider several critical selection criteria. These criteria can include industry attractiveness, the potential for the market to grow, company competitiveness, financial strength, management quality, and valuation (“Engagement Management by Company,” 2022). In addition, investors are recommended to assess a venture’s current position in the market, the industry as a whole, profitability, financial control, and marketability of the organization (“Engagement Management by Company,” 2022). Consistency of profit growth, sustainability of returns, the offered products or services, and the presence of loyal customers can serve as viable factors in a shareholder’s decision to invest (“Engagement Management by Company,” 2022). Overall, investors should understand that every investment holds risks as markets can change quickly, resulting in well-established companies losing revenue (Rapacon & Schmidt, 2021). Therefore, shareholders should account for a variety of measures before committing to long-term investment.
Two Types of Long-term Investors
Potential investors can be divided into two main types based on their engagement. Thus, short-term or long-term shareholders can be either active or non-active (“Engagement Management by Company,” 2022). Potential long-term investors focus on the corporate value when investing and consider the cash flow of the investee companies to be their primary source of return on investment (“Engagement Management by Company,” 2022). Corporate value is estimated by accounting for the company’s assets, earning power, and profitability (“Engagement Management by Company,” 2022). In addition, such factors as the management experience of the CEO, tangible and intangible assets available to the company, and the corporation size can be considered when assessing corporate value (CB Insights Research, 2021). Long-term investors can also add to the corporate value through active engagement. Meanwhile, non-active shareholders do not actively engage in the company management and exhibit less interest in the corporate value of the venture.
Necessary Conditions to Hold Long-term Investors
Corporations that wish to hold long-term shareholders should offer them specific conditions. Thus, such companies should be characterized by a high barrier to entry, good corporate culture, and governance that translate into high earning generating power (“Engagement Management by Company,” 2022). Barriers to entry can be viewed as the primary condition that can attract long-term investments. These barriers can be defined as “factors that can prevent or impede newcomers into a market or industry sector, and so limit competition” (Hayes, 2022, para. 1). Thus, a company operating within an industry with high barriers to entry is more likely to be more profitable and result in a higher return on investments due to limited competition. Cost efficiency and customer captivity can be viewed as high barriers to entry (“Engagement Management by Company,” 2022). However, most barriers are industry-specific and can vary depending on the company’s specialization.
Engagement Agenda with Long-term Investors
The necessary conditions to hold long-term shareholders define the engagement agenda of the investee companies with them. For example, companies can choose to engage with investors on how it creates barriers to entry, such as cost-efficiency measures and strategies to captivate customers (“Engagement Management by Company,” 2022). Thus, business ventures can put issues such as pricing strategies, major financial decisions, and company investments into exclusive technology on the engagement agenda (“Engagement Management by Company,” 2022). Moreover, other environmental, social, and governance (ESG) issues can be discussed during investor engagement activities (Price, 2019). For example, major changes in the company management, such as the dismissal of the CEO or a member of the board of directors, should be communicated to the stakeholders. Overall, engagement agenda with shareholders can incorporate a variety of topics concerning the conditions necessary for their interest in long-term investments in the venture.
Insights to be Gathered from Long-term Investors with Engagement Activities
Engagement with investors is vital, and companies can gather valuable insights from actively communicating with long-term shareholders. Thus, engagement activities can reveal whether the company appropriately responds to environmental changes in the market and how investors evaluate those changes (“Engagement Management by Company,” 2022). It can divulge whether decisions made by the board of directors on specific proposals are valid “Engagement Management by Company,” 2022). In addition, engagement can reveal critical insights about the investors, such as whether they are committed to holding their investments long-term and help build long-lasting relationships with them (McNabb et al., 2021). Engagement schemes can also expose what conditions and characteristics of the company shareholders consider critical for their continued investment. Overall, engagement activities are beneficial both for the shareholders and the company management.
References
CB Insights Research. (2021). How to value a company: An in-depth guide to the business valuation process. Web.
Chen, J. (2020). Investment horizon definition. Investopedia. Web.
Engagement Management by Company [PowerPoint]. (2022).
Hayes, A. (2022). Barriers to entry definition. Investopedia. Web.
McNabb, B., Charan, R., & Carey, D. (2021). Engaging with your investors. Harvard Business Review. Web.
Price, N. J. (2019). Investor engagement strategy: Step-by-step guide. Diligent Corporation. Web.
Rapacon, S., & Schmidt, J. (2021). 7 tips for long-term investing. Forbes Advisor. Web.