On the surface you would think that directors and shareholders of an individual company would pull in the same direction, have the same long-term hopes and effectively work together. This seems fair? In reality the situation can be very different because directors and shareholders often have different expectations and different timescales. So, how does this constant battle between directors and shareholders work?
Long-term vs Short-term
This is effectively a battle between long-term plans and short-term results. Directors have an obligation to look at the long-term future of a company while investors and shareholders very often demand short-term results. Therefore, while many people continuously criticise directors for their perceived “high salaries” it is a full-time battle to put in place long-term potentially lucrative plans while attempting to at least partly deliver for those with a shorter timescale.
Short-term pain, long-term gain
On numerous occasions in years gone by we have seen short-term pain for public companies resulting in long-term gain. One of the best examples of this is probably Amazon which was severely criticised by analysts in its early days for reinvesting money back into the business and not reporting a profit. Despite this growing anger amongst analysts and shareholders the board of directors continued with their reinvestment policy and look where we are today.
Amazon is now one of the largest companies in the world and perhaps the most influential. In this instance the board of directors was proved correct and critical short-term analysts and shareholders were literally blown out of the water.
Successful investors
There is absolutely nothing wrong in taking a short-term profit whether with shares, property or some other kind of asset, the day when taking a profit is wrong is the day when hell freezes over. On the flipside of the coin, if we look at some of the most successful investors of all time, the likes of Warren Buffett as just one example, do they take a short-term or long-term view on their investments?
We all know the answer to that one – Warren Buffett and other successful investors seem to benefit more from taking a long-term view on stocks and riding out the short term volatility. Some of the core investments Warren Buffett holds today have been part of his portfolio for decades. Like so many other successful entrepreneurs and business people he took the view that if the long-term situation remains unchanged then simply ride-out the short term volatility. If the long-term situation does change, re-evaluate and take appropriate action. Simple?
Short-term volatility
Unfortunately there are situations where short-term volatility in a share price can lead to situations which should have been avoided. If a company is discussing funding arrangements behind the scenes and the “shorters” get wind of this they can often sell down the shares in the hope of buying them back at lower levels. This can impact the level at which funding can be arranged and could also in some circumstances put a funding operation in jeopardy. This unwelcome uncertainty can lead to contagion amongst other investors and all of a sudden the shares are friendless. You could argue that directors must work on a shorter timescale when arranging funding operations, as one example, but in reality there are often many parties involved and it can take weeks if not months to put together.
Sentiment is a very important part of the investment markets and once this turns negative it can be extremely difficult to turnaround. Perhaps directors and shareholders should communicate more? Maybe appreciate the goals of one another a little better? In a perfect world all parties would work together for the good of the company but unfortunately the short term/long term views taken by different parties can and have crippled good companies.