As the roles of shareholder and stakeholder begin to converge, dialogue between directors and shareholders continues to intensify. Transparency in companies' shareholdings is increasing, and with it the incentives for more responsible capitalism.
To guide executives at listed companies through this trend, Euronext has developed resources that provide investors with insight into the shareholder composition of companies, as well as helping issuers successfully navigate their financing journey.
Shareholder transparency – The cornerstone of investor relations
Knowing who owns shares in your company and having detailed, real-time knowledge of your shareholder structure are key to a successful investor relations strategy, but also, as we will discuss later, to corporate social responsibility.
The composition of a company's shareholding and how it engages in dialogue with shareholders both heavily influence how the markets react to its announcements and plans, as well as its ability to secure funding and sustain long-term partnerships in pursuit of corporate strategy.
New transparency rules and the digitalisation of shareholder relations have produced two major developments, which give fresh impetus to equity-linked savings that are badly needed: sovereignty in terms of how our companies are financed, and stock markets that are open to a larger population.
Who owns shares with listed companies?
Three years ago, in response to these challenges and the need for sustainable finance, Euronext began publishing studies into shareholder composition at listed companies. These initially covered companies on France's CAC40®, before extending to the SBF120® in 2019 and to Belgium's BEL20® in 2020.
According to the 2020 study for France (1), the 10 largest shareholders on the CAC40® in 2018 included four families with a total shareholding of 21.9%, in addition to four asset management firms and the French and Norwegian governments. Looking at the CAC40® and SBF120® overall, asset management firms (almost one quarter of shareholdings), families and founders (14.5% on both indices) and individual shareholders (5.7% and 4.8% respectively) were the most represented shareholder categories.
Among the most notable developments between 2012 and 2018 was the increased presence of families on these indices, driven not only by the inclusion of new companies such as Dassault Systèmes in 2018, but also by the overperforming luxury sector. The increase in passive shareholdings is particularly noteworthy and was estimated to account for 6.6% of the CAC40® in 2018, made up of Blackrock and Vanguard each with 2.3%, followed by French asset management firm Amundi with 1.4%. This change reflects an underlying trend in the asset management industry.
For a clearer picture of how the number of individual shareholders has changed, we need to go back more than a decade to before the 2008 crisis, when there were almost seven million individual shareholders in France, compared with just over three million today (2). Less favourable market conditions and tax treatment, together with a lack of high-profile market activity accessible to the public, go some way to explaining why people in France have moved their savings elsewhere during this period.
In Belgium, the study (3) highlights the continued influence of family shareholdings (49.3% of BEL20® shares in 2018). In Norway (4), where companies are typically more internationally oriented, overseas investors (half of whom are based in the US or UK) hold more than one third (38.1%) of shares in companies listed in Oslo. Another unique feature there, is the high equity stake of the Norwegian government and sovereign wealth fund in listed companies (33.5%).
Market reactions to company announcements and plans are influenced by shareholder composition
The response of European markets to the Coronavirus pandemic since early March tells us a lot about how market operators have reacted in different ways to this unforeseen and sudden shock.
While benchmarks of passive and alternative investing became unanchored at the onset of the crisis, leading to market volatility not seen in a decade, the main priority of "long-only" asset managers was not to overreact to sudden movements in the market or make hasty decisions, amending liquidity and portfolio risk profiles without significantly changing their long-term outlook (5).
We also witnessed increased individual shareholder activity on equity markets during this period. Were French individual investors tempted back into equities during lockdown, bolstered by the success of La Française des Jeux's recent IPO, at a time when valuations offered an entry point? We will see in the coming months whether or not that trend is set to last.
What do these actions tell us? Undoubtedly, that diversified share ownership is integral to companies' stock market performance. Inclusion on benchmark indices offers visibility and liquidity, but also draws in higher numbers of passive shareholders and investors in long/short funds. Listed companies should therefore strive to build a shareholder structure that combines "stock-pickers" – asset managers who base their decisions on fundamentals, long-term forecasts and confidence in management – and individual shareholders, now increasingly within reach thanks to digital communication, and who provide companies with a solid shareholder base.
From shareholder to stakeholder: increased engagement between companies and shareholders
Shareholder engagement is an ongoing process. As such, listed companies should view this development not as a constraint, but as an opportunity to enhance their performance. Whilst accountability can represent a burden, advances in digital communication technology and investor relations platforms facilitate effective shareholder representation and access for individual investors. We see this in the growing number of "virtual" annual general meetings during the lockdown period (6). Shareholders can now go online to view and participate in presentations, deliberations and votes, creating a forum for dialogue between the company and its shareholders.
Dialogue between listed companies and shareholders will intensify, because it is sustained by two underlying trends:
An economic climate favourable to shareholder activism and hostile takeovers.
In the near term and in view of the market turbulence caused by the pandemic and the ensuing economic downturn, some companies will be vulnerable to hostile actions due to changes in their fundamentals, their valuation and the challenges that the crisis will pose for their governance, which only transparent dialogue and a relationship of trust with their shareholders can offset. Conversely, changes in how companies distribute dividends will be a test of shareholders' responsibility.
A structural trend in the form of the rapid growth of ESG funds.
ESG funds have attracted record levels of investment and even shown resilience for some weeks in the face of recent adverse market conditions. Research has also shown that companies with lower ESG scores than their peers have seen sharper downward revisions in earnings per share for this year, and vice versa (7). This is an unavoidable trend that brings with it far-reaching changes in the asset management industry and, by extension, the requirements imposed on listed companies in terms of extra-financial reporting, governance and shareholder dialogue.
How are shareholders identified and categorised?
In view of these requirements, companies must adopt a more professional approach to investor relations and take on the necessary resources to perform this function effectively, which will include establishing the identity of shareholders using tools such as Shareholder Analysis, developed by Euronext Corporate Services.
Fortunately, European regulators have also introduced reforms to facilitate increased shareholder engagement, most notably the EU's SRD II Directive, which is currently being transposed into law in all EU Member States (8).
The directive, aimed at promoting growth of long-term shareholder engagement, will in practice ensure that listed companies take decisions with a view to their long-term stability:
- Issuers will have enhanced rights to identify their shareholders, with increased transparency regarding who ultimately owns their shares (and no longer limited to the asset management company or overseas depository bank only);
- New standards of communication have been introduced to facilitate the exchange of information between companies and their shareholders, including the procedures for holding and issuing invitations to annual general meetings.
This reform is a genuine opportunity for shareholders to exercise their rights and play their role as an engaged stakeholder. Listed companies now also have a chance to learn more about, and engage in dialogue with, their shareholders. It is incumbent upon us to ensure that upcoming economic developments steer all parties in the direction of open, responsible dialogue.
(1) "Who are the CAC 40® and SBF 120® Shareholders?", Euronext - January 2020 - Nicolas Rivard. Sources: Publicly available data released by issuing companies and information provided by Morningstar (positions of more than 80,000 funds worldwide) and Factset (sovereign wealth funds, foreign governments and pension funds).
(2) "Who are the individual shareholders?", AMF, February 2016
(3) "Who owns shares in BEL 20 companies?", Euronext, January 2020
(4) Source: Oslo Bors VPS, December 2017
(5) "COVID-19: Understanding how portfolio managers can stay on course during the correction of stock markets" Euronext Corporate Services, 7 April 2020 (https://info.corporateservices.euronext.com/webinar-portfolio-managers-covid19)
(6) Company Webcast, Communication challenges in times of crisis, 2 April 2020
(7) Source: Research published by Bank of America Merrill Lynch, 25 March 2020, based on ESG scores from Refinitiv and Sustainalytics
(8) SRD2 ("Shareholder Rights Directive II"): Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement