It is a fair assumption that the CEO of Coca-Cola
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The whole of the Coca-Cola team wants Coca-Cola to succeed – very roughly defined as beating Pepsi. It would be a fair assumption that their shareholders also want Coca-Cola to succeed in beating Pepsi – they own the stock, after all. But this assumption is wrong.
Analysis of Refinitiv Eikon and corporate 13-F filings will show that Coca-Cola’s shareholders break down into four main groups:
Retail investors make up 28% of Coca-Cola’s shareholders – a large number. These investors are part of team Coca-Cola; they are unlikely to hold PepsiCo
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Short-term hedge funds hold another 6% of Coca-Cola’s shares. These investors are trading the stock or the price pattern but are not thinking about Coca-Cola’s specific long-term successes or failures.
Index funds hold about 25% of Coca-Cola’s shares. These funds hold both Coca-Cola and PepsiCo in line with their weights in the relevant index. They would likely prefer that both firms do well but have no preference if one were to outperform the other.
Active institutional investors hold 42% of the shares. Nearly all these investors manage portfolios against an index that would hold both Coca-Cola and PepsiCo, so their job is to overweight Coca-Cola relative to the index if they are favorable on it and underweight Coca-Cola if they are unfavorable. Being underweight a stock relative to an index means that the portfolio manager actually benefits if the stock falls – similar to shorting the stock. About half of the active investors will be overweight Coca-Cola vs. the index and half underweight. Therefore, about 21% of Coca-Cola’s shareholders are active institutional investors that want Coca-Cola to outperform Pepsi.
The key point here is that only about half of Coca-Cola’s active institutional shareholders want it to outperform – and about half want it to underperform.
In sum, the retail investors and about half the active institutional investors are part of team Coke; about 49% of Coca-Cola shareholders want Coke to beat Pepsi. Over half of Coca-Cola shareholders either want Pepsi to beat Coke or are indifferent between them.
Coca-Cola is not an outlier in this scenario. These general proportions apply to most companies’ stocks –even PepsiCo’s (24% retail investors, 41% active institutional investors). The same goes for leaders in other sectors, like Microsoft
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Where does this leave management teams? Understandably confused and frustrated. Most, if not all, of these companies’ management, employees, and retailers want them to beat their competitors. But large swaths of their shareholder base are agnostic at best.
The problem is that most management teams – and most securities laws – assume that the shareholders of a company want that company to succeed by beating their competition. If these companies were sole proprietorships, it would be self-evident that the shareholder and the company have complete alignment in their goals to beat the competition. But publicly listed companies are not sole proprietorships, and the reality is, as the numbers tell us, that the majority of a company’s shareholders do not care if it succeeds vs. its peers.
The further challenge here is that all shareholders have the opportunity to vote their proxies – and retail investors often don’t vote their proxies at all. This means that under a third of those voting are “part of the team,” so to speak. And this analysis does not even consider the issues that can arise when investors hold companies that are adversaries in a merger situation, where votes and holdings are separated as a result of securities lending, or when derivatives are taken into account.
Management teams often wonder who their friends and foes are on quarterly calls. There is the sell-side broker trying to get an edge, the analyst trying to build a model, and the big institutional investors evaluating their positions. Typically, the institutional investor is seen as a friend – someone whose interests are aligned with the company’s in the pursuit of creating long-term value. But smart management knows who is on their team – those overweight their stock – and who is an owner in name only. Ultimately, understanding who genuinely supports the company’s objectives is crucial for management to navigate the complexities of the shareholder landscape effectively.
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