Saturday, August 8, 2009

Stockholders and Gamblers

At the PDMA breakfast this week we had a brief discussion around what drives management styles in companies. In the course of this conversation we talked about the difference between stockholders and speculators.

Speculator s buy a stock because they have a feeling that the stock will rise in price in the short run. Stockholders buy a stock because they believe that over the long term they’ll earn dividends and see a reasonable lift in the value of the stock over time.

I have always wondered why the leadership in companies feel compelled to give quarterly guidance, when that really focuses on the interests of speculators. I suppose it has something to do with institutional investors who can buy and sell large blocks of stock, and use their voting power to, influence CEO’s. But catering to them is weird since speculators are just going to sell as soon as the price reaches the threshold, and then they’re no longer investors. At any rate, the behavior focuses management on the short term, when it is better for the health of the company to be more focused on the long term.

We decided at the PDMA that the whole thing needs an overhaul. The voting rights that go along with stocks should be withheld until the stock has been held by the same owner for a longer period of time – say two years. That way speculators can go along for the ride, without compromising the long term viability of the company, and management can focus on the whole future of the company, not preoccupied with the quarterly results.

Perhaps it should go further and hold dividends in escrow for stocks that have been held less than a year. In order to earn the dividends and then enjoy subsequent dividends, you have to hold the stock for one year. Otherwise you forfeit the dividend and it goes into retained earnings.
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