Tag: Management

Is the growth of Passive Investing distorting stock prices?

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The extraordinary growth of Passive Investing in recent years has resulted in the main Passive Managers – BlackRock, Vanguard and State Street – becoming some of the biggest investors in a disproportionate number of company stocks.

Recent research identified the scale that these ‘Big Three’ Passive Managers now control:

BlackRock, for example, had a 5% shareholding (or more) in about two thousand companies in the United States – out of only 3,900 publicly listed U.S. corporations.

Which means that BlackRock holds 5% blocks in more than a half of all listed companies in the US.

Vanguard had 1,855 five percent blockholdings worldwide, of which around 1,750 were in U.S. listed companies – accounting for 45% of all US listed companies.

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Amazingly, the ‘Big Three’ combined constitute the largest shareholding block in 1,662 companies – or 40% of all listed companies in the United States. And their mean ownership accounts for more than 17.6% in each of these companies.

Within the S&P 500 specifically, the ‘Big Three’ combined constitute the largest owner in 438 of the 500 most important American corporations – around 88% of all member firms.

These 438 corporations account for about 82% of S&P 500 market capitalization.

This is an enormous concentration of ownership, a concentration that is at risk of distorting the stock markets, the investment industry – and the way that CEOs and Corporate Boards need to manage and direct the companies that they represent.

Because, unlike Discretionary Investors, Passive Investors neither measure nor trade stocks based on Company Fundamentals.

They have limited engagement with the companies that they invest in.

And when Activists get involved, Passive Managers support Activists in around 50% of proxy votes.

This creates serious implications that companies must respond to as a matter of urgency – and fiduciary duty.

For much more detail about “The Rise of Passive Investing – and how Companies should respond”, you can download a complete, complimentary copy of our latest Reputation Report on the subject by clicking here.

Reputation is a Strategy Consulting Firm that provides personal counsel to Asia’s leading CEOs, advising them how to build and protect their company’s Market Value in the new world of business – and the new age of investing. 

If you would like to discuss how we can help you build and protect your company’s Market Value, please connect with us via our website or by email to Connect@TheReputationPartnership.com.

How a company’s ‘Corporate Purpose’ improves its stock performance.

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Recent Analysis finds that 2 components are critical for successful Corporate Purpose projects.

A new research study that has just been summarised in a recent issue of the Harvard Business Review analyses the power of Corporate Purpose to influence a company’s financial performance.

The study analysed 429 companies, carried out proprietary research among more than 450,000 employees, and their findings are fascinating.

Here are just three of their most significant conclusions:

  1. A strong sense of Corporate Purpose does not lead to any improvement in Financial Performance on its own

Companies with a strong Corporate Purpose were judged by their employees’ agreement with statements such as “My work has special meaning; this is not just a job”; “I feel good about the way we contribute to the community” and “I’m proud to tell others I work here”.

Although such companies generated a strong sense of purpose among their employees, and created a workforce that was motivated and engaged, the study found that such companies “weren’t correlated with firm financial performance in either direction”.

In short, strong Corporate Purpose on its own has no significant effect on a Company’s Financial Performance.

But when Corporate Purpose is combined with one other critical Corporate quality, the effect is transformational.

  1. When Corporate Purpose is combined with Management Clarity, however, it significantly improves both Financial Performance and Stock Returns

In companies where strong Corporate Purpose was combined with Clarity of Management Leadership, there was a significant financial impact.

Management clarity was measured by employee comments like: “Management makes its expectations clear” and “Management has a clear view of where the organisation is going”.

The report finds that Companies which combine these two dimensions – Corporate Purpose plus Management Clarity – “exhibit superior accounting and stock market performance”.

In fact, the report found that “a portfolio of high ‘Purpose-Clarity’ firms earn significant positive risk-adjusted stock returns in the future, up to 7.6% annually”.

But it is not simply the combination of Corporate Purpose and Management Clarity that drives this dramatic change.

There is one more critical ingredient that drives Corporate Performance.

  1. ‘Middle Management Engagement’ is the most critical influence in the successful conversion of Corporate Purpose into superior Financial and Stock Performance

Not surprisingly, the research found that “the more senior the employee, the stronger is the perceived purpose of the organisation”, because most senior employees are more involved in the development of Corporate Purpose – and are often incentivised according to its principles.

More significantly, however, the research also found that “it is solely the middle managers and salaried professionals that drive the relation between high ‘Purpose-Clarity’ organisations and financial performance.”

This is because middle management drive the day-to-day decision-making that enables Corporate Purpose to be put into Corporate Practice.

Or, as George Serafeim, one of the authors of the report summarised – middle managers can become:

“Managers who buy into the vision of the company and can make daily decisions that guide the firm in the right direction.”

They convert Management Clarity and Corporate Purpose into day-to-day decision-making:

“This clarity enables the translation of purpose from an abstract idea to specific actions that employees have confidence will be recognised (and rewarded) by their superiors”.

Like many similar analyses, we see that grand statements of Corporate Purpose are worthless without real Employee Engagement translated into daily actions.

Reputation is a Strategy Consulting Firm that provides personal counsel to Asia’s leading CEOs, advising them how to build and protect their company’s Market Value in the new world of business – and the new age of investing. 

If you would like to discuss how we can help you build and protect your company’s Market Value, please connect with us via our website or by email to Connect@TheReputationPartnership.com.