Big resources among small shareholders

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The Independent Online
Ever wondered what lip service sounds like? Listen to company secretaries talk about small shareholders.

"Commercial democracy is a wonderful idea," they say guardedly, "but. . ."

There is always a but. But it's so expensive to keep them on the register. But it's such a hassle dealing with their dividends. But it's so irritating when they take over the annual meeting and fire impudent questions at the directors. The list goes on. "These small shareholders seem to think they own the company," they sigh. Perish the thought.

Company secretaries who regard small shareholders as the bane of their lives are surely missing a trick or two.

Viewed from a fresh perspective, small shareholders can be seen as a real asset - as potential customers and, quite separately, as a defensive wall against predators.But to get the best out of small shareholders, as customers or allies, they need to be nurtured. It is curious that a company may have tens of thousands of small shareholders on its register and yet make little effort to increase their value.

Some companies have the right idea. P&O shareholders are offered discounted ferry and cruise fares and Sketchley knocks 25 per cent off its shareholders' dry cleaning bills. Such offers should be seen not as perks but as the elements of an effective sales strategy - quite apart from the additional benefit of encouraging a loyal and stable shareholder base.

As a shareholder you may already go out of your way to buy your company's products. Turning shareholders into customers is the easy part. The more difficult trick is turning customers into shareholders.

By law, companies are barred from managing their own stock. They cannot take out newspaper advertisements or run television campaigns exhorting the public to buy their shares.

There may be a good case for letting companies market their stock under controlled circumstances. But there are other ways of getting the message through - and a customer base provides the ideal medium.

Every week hundreds of thousands of shoppers crowd the aisles of the nation's supermarkets, squeezing their trolleys through the checkouts, paying their bills, then loading up the car and driving home. What a wasted opportunity. The checkout clerk should be inviting the shopper to add a couple of pounds to the weekly food bill - in the form of a savings scheme into company shares.

Company secretaries may complain that they find it hard enough to cope with their current volume of small shareholders, never mind a new wave of shoppers. But small shareholders are increasingly being switched into nominee holdings (such as company PEPs) as five-day rolling settlement takes effect - a move that promises to make the maintenance of share registers much easier and cheaper.

The trend towards nominee holdings is also making the small shareholder a valuable line of defence against hostile bids. The usual line of attack taken by a predator is to pitch directly to the shareholders of the intended victim. Since the offer per share tends to be greater than the current market price, it is not difficult for the predator to make a persuasive case.

City opinion has it that small shareholders, in particular, will be happy to take the money and run, being less likely to take a long-term view of their investment. But the impact of five-day rolling settlement is changing the equation. Persuading the small shareholder to sell is one thing. Nominee holdings are a much tougher nut to crack.

The implication of this is clear. The introduction of a company PEP scheme, apart from the many other benefits of such a move, is a sound defensive strategy. Encouraging small shareholders to move their stock into the PEP makes good sense. Allowing them to put other companies' shares into the scheme as well - making it a multi-stock PEP - makes even better sense.

Of course, the mere fact that stock is placed in a PEP or some other form of nominee holding is no guarantee that the shares will evade the predator's claws, but it does make it less likely.

And let us be quite clear about the importance of the small shareholder in takeover battles. The average company has 75 per cent of its stock under institutional ownership. The remaining 25 per cent is in private hands, a powerful and potentially pivotal stake.

Far from being an expensive nuisance, to be kept in a cupboard and let out only for the annual meeting, small shareholders are an asset no company should ignore.

The author is business development director at Barclays Stockbrokers.

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