How to Keep Stockholders Happy

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Shareholder relations are one of management's key responsibilities. While some stockholders are passive investors, others are deeply interested in the affairs of the companies in which they invest. Corporations can keep stockholders happy by maximizing shareholder value, aligning incentives, increasing shareholder participation and establishing regular communication channels. These measures have the effect of increasing shareholder engagement and demonstrating that management is acting in the interests of shareholders.

  • Create shareholder value. Your prime objective as a management team is to maximize free cash flow. This is accomplished by making investments in projects with a positive net present value. When evaluating opportunities, remember to select a discount rate that appropriately reflects the risk of the investment. All things being equal, a riskier project should be discounted at a higher discount rate and generate a higher return to shareholders.

  • Increase shareholder participation in the decision-making process. As fractional owners of your company, many stockholders are interested in your company's affairs. By empowering them beyond the annual general meeting, you can broaden your dialogue with shareholders and deepen the relationship. Two mechanisms to achieve this include establishing a separate board with shareholder representatives as occurs in Germany and holding more frequent meetings as occurs in Japan.

  • Align management and shareholder goals through incentive plans. By designing a thoughtful incentive system, you can address concerns about the agency issue. A blend of cash and equity compensation is desirable to compensate the management and board of directors. Restricted stock and stock options with long vesting periods are effective forms of equity compensation as they will focus the company on maximizing shareholder value over the long term.

  • Establish regular communication with Wall Street. By communicating future expectations on a regular basis, you will avoid surprising shareholders, particularly when it comes to bad news. Articulating your company's capabilities, strategy and progress toward achieving goals will all have a pronounced impact on how shareholders perceive your company. Ongoing dialogue with shareholders to set expectations will further ensure that the stock price reflects its true value as closely as possible.

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