See Ken.
See Ken drive.
See Ken drive a Ford.
See Ken smile as he says, ‘To this day, my car is always a Ford product. I would never dream of owning another car.’
Ken is not a fictional character from a TV commercial but a real person who – as his enthusiasm for Ford automobiles may hint – is a longtime shareholder in Ford Motor Company. And one more thing: He also happens to be the head of an association whose members account for roughly $125 bn worth of stock in the equities market. He is Ken Janke, president and CEO of the National Association of Investors Corporation.
Now, if you’re Ford Motor Company, you love having an investor like Janke. Not only is he influential among shareholder circles, he is also your loyal customer, defender and advocate for your business. He is in many ways the ideal shareholder.
Ford boasts shareholder rolls with plenty of longtime investors such as Janke. According to Steve Harper, Ford’s shareholder relations manager, ‘At the time of our recapitalization in August 2000, we had about 3,000 registered accounts out of about 200,000 that had 1956 certificates still outstanding. I mean, that’s loyal!’
As Harper would attest, loyalty is a quality that proves itself over time, so it isn’t something investor relations officers can hope to manufacture overnight. However, they can take certain tangible steps to help establish and strengthen loyalty among shareholders. The real question is, are they going about it the right way?
A bribe by another name
Free products, alluring promos, valuable discounts – these are all the kinds of perks companies offer their shareholders to court favor. From the Wrigley Company sending out free chewing gum holiday packages, to the Hilton Group offering stakeholders discount hotel rates, to British Airways enticing investors with lower airfares and frequent-flier points, many companies try to keep shareholders smiling by lavishing trinkets and tchochkes on them.
Granted, they know that few investors would buy stock just to get the perks; a voucher for a free Big Mac isn’t the kind of thing that would prompt even burger lovers to go out and buy McDonald’s stock. As Harper declares, ‘The thing that ultimately keeps a shareholder loyal and gets him to keep the stock for very long periods of time is either dividend or appreciation.’
Still, perks can help score brownie points among those who may already like a company and would consider buying into it. And they can shed some additional light on companies that aren’t all too well known, exposing them to new groups of potential shareholders. Several investor groups such as the UK’s Hargreaves Lansdown and Premier Asset Management even compile annual guides to shareholder perks.
Furthermore these tokens of appreciation – small as they may be – can go a long way towards building valuable goodwill between the company and its shareholders, and can become good investments in the long-term relationship.
Where to begin?
Chris Holleyoak, Computershare’s global services group head in the UK, has this advice: ‘The first thing to do is sit down and ask what are the behaviors you want to encourage among your shareholders, and what rewards you have to give them. A company may look at its shareholders and consider how much stock they own, how much their holdings have increased over time and how long they have held their shares.’
The best behavior investors can exhibit is to hang on to the stock even if its performance falters. Although an issuer may want to believe its shareholders will wait obediently through down cycles, restructurings, write-offs and underperformance, unless it can come up with some very good incentives, few shareholders actually will. That is why most loyalty programs target individual investors; on the whole they tend to be less performance-oriented than institutional investors.
Once companies decide what behavior they want from their shareholders, the next step is to determine what they themselves can bring to the table.
Many companies have demonstrated that incentives can be a lot more valuable than a pack of gum or a cheeseburger.
For instance, Florida-based TIB Financial Corporation offers incentives to its shareholders who are also commercial banking customers. Connie Miller, TIB’s assistant vice president, investor relations, says these include higher deposit rates, higher interest rates, free overdraft protection, free internet banking, free checks, free safety deposit boxes and other goodies.
Likewise, New York-based Medis Technologies recently introduced a loyalty program that gives shareholders the right to exercise three-year warrants to purchase additional shares that are price-pegged to the program’s record date. Medis chairman and CEO Robert Lifton says the incentive not only encourages investors to stick around for at least three more years, it also keeps them rooting for the company’s continued growth. ‘It’s an attractive warrant, so we’ll see how many shareholders participate in the program. Already large numbers of them are moving the stock into their name [from street-name].’
Another company, Munich-based Knorr Capital, has developed a complex and innovative loyalty program. Because the regulatory environment prevents Knorr from offering more traditional perks, the venture capital firm created a points-based system to encourage shareholder participation. Investors can win points by giving the company feedback, for instance, or by submitting written articles to its newsletter. They are rewarded with various prizes depending on the number of points they earn. These could include a power-brunch with the CEO, a trip to the Munich Stock Exchange, or participation in pre-IPO investments in selected Knorr portfolio companies.
Ideally, companies want to demonstrate their appreciation of shareholder loyalty by giving their investors rewards that are not only valuable, but also unavailable to non-shareholders.
Can we talk?
While perks can go a long way to win friends and influence shareholders, Holleyoak says few companies truly capitalize on their potential. ‘If you simply give vouchers to your shareholders, how effective is that? It doesn’t actually build up the relationship between the company and the shareholder because there isn’t any interaction: I get my voucher, I go spend it, and that’s it.’ Vouchers may be effective on their own in terms of bringing people into the store but they don’t promote what Holleyoak encourages: a dialogue between issuers and their shareholder.
Richard Taylor, director of business development at Pepper Technologies in Germany, urges companies to take their loyalty programs further. ‘One of the first things you might want to do is incentivize shareholders to receive electronic documents such as annual reports.’
According to Taylor, getting them to sign up for electronic information achieves many goals. It can make communicating with them easier; it can help to track their behavior and measure how they are taking advantage of the incentive program; and it can save the company money by reducing the amount of hard-copy reports it has to print and distribute. ‘It lets companies communicate with their shareholders in a more interactive way than they could in paper environments,’ Taylor observes.
Companies may also use the initial electronic interaction as an opportunity for gathering various kinds of data. This might include the shareholder’s contact information, knowledge of products and services, personal preferences, or anything else. The investor relations office can then share this data with other departments.
One potential obstacle to direct communications is the shareholder registration structure. Shares held in street-name often prevent issuers from knowing who exactly owns those shares, so many companies stipulate shareholders transfer their registration to their own name in order to become eligible for a perks program.
‘We take the view that the process can become much more dynamic by first understanding the shareholder base better and then having a system around the perks to create feedback,’ Holleyoak explains. ‘You essentially end up in what would be called a campaign environment.’
Where the heart goes, the wallet follows
Of course, a loyalty program is clearly not worth its salt if investors take advantage of the perks before turning around and dumping the stock. Investor relations officers know that building loyalty is about much more than incentivizing obedience. It’s about building a culture of ownership appreciation – both within the company and the stakeholder base – and about offering owners the opportunity to have input.
‘If you’re trying to promote loyalty over time you want people to take more of an active interest in the company. This comes from improving investor relations, encouraging more back-and-forth communications, and giving people a better understanding of the company they have bought into,’ Taylor suggests. ‘In that way you start incentivizing a more proactive dialog.’
Holleyoak points to Knorr Capital’s points-based system as a good way of encouraging shareholders both to give the company their feedback and to feel as if their input is valued. This goes a long way towards encouraging shareholders to proactively communicate with the company and towards strengthening the relationship.
These qualities are important in all kinds of market conditions, and especially during difficult times, Holleyoak says.
‘It then comes down to the management of those relationships. If you have a shareholder loyalty program in place for a period of time, and you’ve built up your relationships, and then the stock starts bombing, that is the ideal opportunity to turn around to those shareholders with a message.’
If the stock is underperforming, Holleyoak believes, shareholders will be unreceptive to excuses from the company unless they have already built an open dialogue. A successful loyalty program could be the difference between the company’s message being ignored or being taken to heart.
Retail advantage
The National Association of Investors Corporation’s Ken Janke says companies that sell retail products and services are in an ideal position to attract loyal shareholders from their customer base. Not only will customers have a better familiarity with the corporate brand than the average person, but the investor/customer – or investomer – can become the company’s most valuable public partner.
Janke believes a prior relationship with customers gives companies a foot in the door when it comes to selling their stock. That’s not to say other companies are left in the lurch, however. He says they can look elsewhere to find people who appreciate their business. ‘An engineering company that sells to automotive industry, for example, wouldn’t use its product to build a loyalty program,’ Janke says. ‘But maybe it would feature its annual report in an electrical engineering magazine or a trade publication to let those readers know what the company does.’ The point is to expose the company – and its stock opportunities – to new groups of potential shareholders. Susan Colby, director of stockholder services at General Motors, believes investor fairs offer all types of companies the opportunity to market themselves. ‘We have scheduled our regional stockholders forum to coincide with the NAIC National Congress & Expo. We invite our stockholders to the NAIC meeting and we also talk to people who aren’t necessarily shareholders. And if they express an interest in the company, then we invite them to come to our forum as well.’
Janke believes the key is to find potential shareholders who, although they may be unaware of your company, have a knowledge of or an interest in your industry. Essentially corporations want to have people buy their stock not only because they think it is an attractive investment, but also because they have an appreciation for the business.
Mapping the program
Ford’s Steve Harper advises issuers to plan their incentives programs carefully, since otherwise they may risk collision with obstacles down the road. For instance, Ford’s sales and marketing team came up with what he calls ‘a wonderful vehicle discount program exclusively for shareholders’ which originally involved giving rebates to those who bought a new vehicle. However Ford hit the brakes when it realized its investomers would have to declare this sum as taxable income.
The solution? ‘We extended to shareholders offers made to other affinity groups so we could classify them as advertising-and-sales promotions,’ Harper explains. For example, Ford’s program offers preferred rates for Hertz car rentals. ‘It’s the best discount rate that we give large customers, and because we’re extending this program to both shareholders and non-shareholders, it isn’t a taxable dividend.’
