Shareholder perks: why it pays to offer your investors a freebie
Giving shareholders a perk is an idea that went out of fashion. It’s time to revive it, says Matthew Lynn.
Last week the American cinema chain AMC started offering a free box of popcorn to anyone who owned its shares. Soon afterwards, armies of small investors, the same crowd that drove the valuation of GameStop through the roof at the start of the year, piled into the shares, sending them into the stratosphere. AMC took a lot of flak for encouraging wild speculation. But in truth there was also the, ahem, kernel of a good idea in there.
Better the mob than the hedgies
The freebie for private shareholders is far less common than it used to be. Founder shareholders in Eurotunnel got a set number of free tickets every year. Retail chains such as Marks & Spencer would routinely offer some form of discount to owners. But over the last decade, as the equity markets have become more tightly regulated, and more dominated by professional investors, the freebie has largely died out. But they have been making a modest revival in the fast-growing, and less tightly controlled, crowdfunding market. The rapidly expanding drinks and pub chain Brewdog offers discounts for anyone that buys its equity, for example, and the English wine-maker Chapel Down offers discounts to shareholders.
Regulators will argue such perks encourage speculation. In some cases, perhaps, people will be tempted by the special offer, and not spend as much time as they probably should looking at the balance sheet, checking the price/earnings ratio, and working out whether the company has the right strategy for growing the business. Against that, however, there are two big advantages to the freebie.
First, it encourages long-term ownership by small investors. The percentage of equities owned by private investors in the UK has stabilised after many years at 13%. In the US it has even started to edge up again, fuelled by free trading apps, and the amount of information that can be swapped on the internet. Yet it is still a tiny percentage of the total, with the rest held by investment funds, banks and hedge funds.
Get the punters onboard
Many CEOs may think private investors are not worth the hassle: you can’t talk to them one on one, you can’t ask them to stump up more cash when you want to launch a big takeover deal, and they have a habit of demanding dividends when you would rather spend the money on something more interesting. Yet they are also typically far more loyal, and will support a business through good times and bad – certainly far more so than whichever hedge fund would own the shares instead – and they are usually far less bothered by quarterly performance or benchmarking a company against its peers: so long as the CEO has a strategy they believe in, and the business makes profits, they will back it.
Secondly, freebies help turn customers into shareholders. For a freebie to work, it has to be related to the actual business. Free popcorn for a cinema chain is a great example. So is a free beer for a brewer. An airline could give away a travel voucher, as could a hotel group; a restaurant chain could offer a free pizza, or wine with a meal; and a retailer can offer a discount. If the deal is a good one, then it will encourage the most enthusiastic customers to buy shares in the business. And they are, after all, the people who understand the business best and are more likely to come back again and again. The freebie might cost a little money, but overall it might well boost sales.
The best companies are a community of stakeholders, including managers, staff, suppliers, customers and shareholders. They should all be enthusiastic about the product and want it to succeed. The greater the common interest between all those groups, the better it will do in the long run. Special offers for private shareholders might have gone out of fashion, but they are a great way of making that happen.