| BUSINESSWEEK ONLINE : SEPTEMBER 13, 1999 ISSUE | ||||||||
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| MANAGEMENT
When Capital Gets Antsy How stock churning is reshaping Corporate America On a recent Monday morning in New York, DoubleClick Inc. (DCLK) Chairman and CEO Kevin O'Connor delivers an upbeat pep talk and welcome to some 40 new recruits in a stuffy basement classroom. But his greeting also contains a cautionary appeal. ''It's very easy to sit here and measure your success by the stock price,'' he says. ''But we want to make long-term strategic decisions, even at the expense of the short term.'' In an era when option-laden managers are often fixated on their company's stock price, O'Connor's admonition is an important one. As a super-hot dot.com company that has carved out a leading position in Web advertising, DoubleClick's stock has soared, thanks to the market's infatuation with the Internet. At the same time, though, that infatuation has turned DoubleClick stock into something of a poker chip at a blackjack table. The average DoubleClick investor holds on to the stock for a mere five trading days. The company's entire float--all the shares it has issued minus those held by insiders--changes hands roughly 50 times a year. DoubleClick isn't the only one. Capital has become more impatient than ever as greater numbers of people view the stock markets as casinos. It's not only day traders. Institutional investors, from mutual funds to pension funds, are also shrinking their time horizons. New data prepared for BUSINESS WEEK by Bain & Co. director Darrell K. Rigby show an astonishing increase in the speed with which shares now change hands. Some 76% of the shares of the average U.S. company listed on the New York Stock Exchange turned over last year. That's up from 46% in 1990 and only 12% in 1960. Through May of this year, the annualized rate was 82%. On the Nasdaq, where more high-flying, high-tech concerns are listed, shareholder turnover is nearly three times as high. So far, most companies--especially Net stocks--have benefited from such churn, largely because stock prices have remained high despite the recent correction. But if the market stalls or declines, many observers believe that impatient shareholders will bolt, turning what would otherwise be a normal retreat into a full collapse. An exaggerated reaction to negative news can hurt a company's ability to attract and retain key employees or use its stock for acquisitions. Higher volatility, economists say, also raises the cost of capital. What does a shareholder who holds a stock for a week expect from a company's management team? Probably not a strategy that positions the business for long-term success. American managers have long bemoaned the pressure placed on them by Wall Street for short-term results. But as O'Connor along with more traditional chieftains knows, the urgency to boost stock performance, and do it hastily, has never been greater. That is why many in Corporate America are taking the trend seriously. They're paying vastly more attention to the care and feeding of Wall Street. How? By more closely monitoring and managing their core shareholders, recruiting long-term investors, and strengthening the investor-relations departments that interact with Wall Street and the people who put their money into a company's stock. Philip Morris Cos. (MO), the tobacco and food giant, is now trying to sign up more institutional investors in Europe because they tend to have longer time horizons than those in the U.S. Raytheon Co. (RTN.B), the defense and electronics concern, is targeting longer-term investors with the goal of creating more stability in its stock. And a major U.S. chemical company set a goal of adding three long-term major shareholders to its investor base this year. A closer look at the numbers shows why companies are taking action. The average share in Amazon.com Inc. is now held for seven trading days before being sold to someone else. The average share in Dell Computer Corp. (DELL) changes hands every 3.7 months. Even Microsoft Corp. (MSFT) shareholders don't hang around long: less than seven months, on average. Oh, sure, you're thinking, these high-tech stocks are the darlings of a new generation of computer jocks who bounce in and out of stocks by the minute. What about the stalwart blue chips? Remarkably, shareholders are proving restive even at companies once considered the quintessential investments for the proverbial widows and orphans of yesterday. A share in AT&T is now held an average of 1.1 years, down from 3.1 in 1992. A General Motors Corp. (GM) shareholder stays with the company for just 51 weeks on average, less than half the 2.1-year commitment back in 1990. The consequences of this shift are potentially profound. As shareholders become more ephemeral, their impatience gets passed along to the managers of the companies they are trading. That pressure, as DoubleClick's O'Connor acknowledges, can be reinforced by the stock options and share holdings of managers and employees who can be tempted to make decisions on the basis of what is expedient instead of what is critical to long-term growth. ''I've seen so many senior executives saying and doing things to deliver short-term good news lately that it's a little frightening,'' says Rigby, who has extensively analyzed shareholder turnover. ''Their time horizons are shortening. They're thinking more about retiring rich at 45 or 50 and less about the institution they will leave behind.'' The financial meltdown that has nearly put appliance maker Sunbeam Corp. in bankruptcy, for example, can be traced to a near-all-out focus on short-term results, most analysts agree. Chairman Albert J. Dunlap actively recruited managers and investors who were looking for a quick payoff and sacrificed the company's long-term prospects in the process. When the payoff failed to materialize, Sunbeam imploded. And it's not just basket cases like Sunbeam that are affected. In the more governance-conscious 1990s, increased churn can destabilize stronger companies, too. Jittery shareholders are likely to create jittery directors. To invite greater board scrutiny of management is hardly a bad thing. Yet when some investors bail out of a stock in volatile markets, others rapidly follow, and then more lose their nerve. That kind of cascade can cause hypervigilant directors to demand a reshuffling of management because even their longer-term shareholders have become more sensitive to downturns caused by bad news. Investors may think they can jump back in when the downside risk is resolved. ''But if the management team is replaced and the strategy is changed, then the optimal long-term strategy may never get a chance,'' believes Rigby. NO ACCIDENT. To be sure, faster shareholder turnover can have an upside, too, if it's not carried to an extreme. For one thing, it keeps capital markets efficient, enabling strong companies to acquire and integrate weak ones--especially in a rising market. For another, increased volatility keeps managers on their toes. It suggests that shareholders are regularly reassessing their commitment to a company and are giving executives less room for idle promises. ''What's wrong with a little pressure for returns?'' asks Edward V. Regan, former New York State comptroller and a key player in institutional shareholder activism. Regan, who ran New York's pension funds for 14 years until 1993 and is now a fellow at the Jerome Levy Economics Institute, doesn't think it's an accident that churn has risen to nearly unprecedented proportions just as the American economy is in the midst of the longest peacetime economic expansion. ''In the late '80s,'' he recalls, ''executives asked us why we weren't like investors in Japan and Germany who didn't pressure companies for short-term results. Look at Japan now. I don't want the CEO to put his feet up on the desk and think that none of his shareholders will bother him.'' Most of the churning today, of course, can be traced to mutual funds, which own a higher percentage of stock than ever. Fund managers, who are constantly compared and judged against their peers, are under unrelenting pressure to eke out the highest returns possible. The result: They often buy and ditch stock daily. Then there's the rise in day trading. The practice, which is spreading like kudzu, has greatly heightened the market's volatility--and left managers bemused. ''Ten years ago, the notion that people would be sitting in their dens trading stock daily would have been Wall Street's version of The Twilight Zone,'' says James E. Chestnut, chief financial officer of Coca-Cola Co. ''It makes it more challenging than ever to manage for the long term.'' Rod Serling, however, would not have to limit this Twilight Zone episode to supercharged fund managers and Internet day traders. Even some of the nation's largest pension funds are turning over their investments more quickly. At the College Retirement Equities Fund's flagship stock account, with $119.5 billion in assets under management, turnover hit 34.6% last year, up from only 16.3% in 1995. Most of that extra turnover is the result of CREF's use of modern computer-based analysis and trading systems that take advantage of the short-term up-and-down movements in stocks. CREF says the techniques have helped boost returns, though it can't quantify the improvement. DATING GAME. As the exchanges extend their trading hours and churn becomes ever more prevalent, companies already are spending more time recruiting and communicating with shareholders willing to commit more patient capital. Coca-Cola and Pfizer Inc. are two companies that have pioneered the field of shareholder relations since the early 1990s. As a pharmaceutical company whose future is dependent on sizable research and development investments that can take years to pay off, Pfizer beefed up its investor-relations effort to enlist shareholders who more clearly understood the company's need to make those long-term bets. Indeed, churning and the increased emphasis on ''shareholder value creation'' has helped to transform the field of investor relations. Once a ghetto of the public-relations function, it is increasingly considered a strategic tool to help position a company in the markets. Heads of IR departments now report to the chief financial officer or CEO and often command significant staffs of professionals trained in finance. ''Our goal is to provide stability in our stock,'' says Barbara L. Gasper, vice-president for investor relations at Raytheon. ''Volatility in a stock often implies uncertainty. Stability and predictability are things that investors are comfortable with. By broadening your shareholder base, that should help provide more stability.'' Most executives believe that high churn is a worrisome development and are working to create a core of long-term shareholders in their stocks. ''It provides continuity and stability,'' says Robert L. Edwards, chief financial officer of Imation Corp., a data-storage spin-off of 3M. ''It's in the long-term interests of all the stakeholders to have a stable shareholder base.'' Shareholder churn has even prompted the equivalent of an investment dating service to help companies track down investors with a sense of commitment. Thompson Financial Services analyzes investor turnover on a daily basis, closely monitoring some 1,700 institutional shareholders and their portfolios. ''We help companies identify institutions that are likely to hold on to their stocks longer than a few minutes,'' says Richard A. Wines, senior managing director. Thompson prioritizes the most stable potential investors for a company and then helps to arrange a match, fine-tuning the company's appeal and arranging meetings to persuade prospective long-term shareholders to move into a company's stock. High churn can be especially problematic for companies that are in the midst of a major overhaul in operations or spin-offs. ''When there is a change in the strategic direction of the company, you've got monster turnover in shareholders,'' says Charles C. Conaway, president of CVS Corp. (CVS), the $17 billion drugstore chain. Conaway went through a seismic shift when CVS emerged out of a major restructuring in 1995 of Melville, the retailing conglomerate. The change triggered nearly a complete turnover of the company's shareholders in one year. CVS actively recruited long-term institutional investors who would better meet CVS' new growth profile, visiting with as many as 40 major shareholders. ''Unless you have a very targeted investor-relations program that communicates your message, you're going to get into trouble,'' says Conaway. At DoubleClick, O'Connor doesn't want his employees--all of whom get stock options--to be so transfixed by the company's shares that they forget their overriding mission to provide solutions to DoubleClick's customers. ''We don't care about the stock price at the end of the day,'' he says. ''It comes down to solving the customers' problems, not the price of the stock.'' At a time when churning seems endemic, it is a message that more chieftains need to deliver. By John A. Byrne in New York To read a letter to the editor about this story, click here. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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