You have probably experienced this at your bank - You hold a shareholder meeting and of your 1,000 shareholders, only twenty people showed up and ten were directors, two were past employees and five were there for the free lunch. Your chairwoman shrugs at the turnout and then jokes that at least you don’t have any activist in the crowd. You all have a quick meeting, a good lunch and then get back to work. However, on the way back you just feel like there is something more. The reality is – you are missing something. While we covered great bank shareholder letters (HERE) last week, today we move a level up to tackle the importance of the shareholder meeting.
Most banks rationalize a poor meeting and chalk it up to investor apathy. They reason that investors are a passive bunch, and since they don’t really add to the bottom line, putting energy into a shareholder meeting isn’t worth much. It is sound logic, but most likely wrong. There are companies out there holding fervent and poignant meetings and moving their shareholders to be raving fans. Berkshire Hathaway falls into this camp, as does Apple, Whole Foods, Wal-Mart and a host of others. While your bank may never approach that level of engagement, that doesn’t mean you can’t increase the passion. Doing so will not only likely result to more fans, more customers and a stronger bottom line but will usually result in a higher stock price.
The Correlation Between Liquidity And Equity Price
Many bank CEO and directors lament their light equity float and the lack of liquidity in their stock. Most every bank needs more liquidity.
You can’t escape the fact that a bank’s stock price is a simple function of just two things – sentiment and liquidity. It just so happens that both factors can be influenced by spending more resources on creating improvements in both.
In finance, the impact of liquidity on share price is well documented both theoretically and empirically since it is a central tenant in a standard asset pricing model. The wider the bid and ask of a bank stock, the more “friction” is present in a transaction. That greater friction is discounted in a bank’s stock price and further factored in as a potential source of uncertainty. That liquidity risk also acts as a further discount on the price. Institutional investors won’t even entertain a bank stock unless it has a certain amount of liquidity. As a result, the more illiquid a bank stock is, the lower it trades.
If “How much lower?” is your question, then we can turn to the data and Amihud and Medelson out of the NY Stern Business School that produced seminal research on the topic back in 1986. They found that based on how stocks were trading, if they adjusted for risk, they could isolate the cost of liquidity. The graph below shows the plot of that formula that shows that for a bank with a 1% spread between their bid-ask (very common for a community bank) compared to a bank stock with a 0.50% spread, that the bank with the larger spread would have to produce a return of 0.15% per month above the risk-free rate (Treasuries).
In other words, your bank has to produce an additional 1.8% of return to compensate for that 50bp difference between the bid-ask. Think about the level of resources you need to expend in order to increase your return on equity by 1.8%!
How to Pull It Off
While few bankers wish for activist drama, and since your bank likely does not have the investment track record that Warren Buffet does, how do you create a mini-Woodstock of Capitalism? Here is a set of five actionable tips learned from the masters. Most of these tactics revolve around giving your shareholders a reason to come to the meeting.
Shareholder Letter: While we covered the finer points in last week’s The Best Bank Shareholder Letter You Ever Wrote, we now point out that the shareholder letter sets the tone for a great shareholder meeting and provides the call to action for readers to show up.
Make It An Event: Next to your customer appreciation events, the shareholder meeting is your next best choice to pull out all the stops. You go to an annual meeting to hear about the company, so it’s the perfect venue to talk about yourself. However, as a tradeoff, you can also invite some notable talent, even if you have to hire them. Consider a motivational speaker, a military/public service hero, a politician or another leader that can help extend the bank’s brand. Maybe there is an employee or customer with a great story. Whatever the case, the speaker should be a draw and impart a message that is a core belief of the bank. Turn your shareholder event into a "thank you" for investors and customers and you might get a little more of both.
Product Release & Discounts: While you are not releasing the iPhone6S, many banks have innovative products that are perfect for an unveil at a shareholder meeting. This is a famous Elon Musk tactic that always works like a charm. In similar vein, you can offer a discount on a new or upgraded product. Get a track record of providing tangible value and you will get more customers that want to be shareholders and more shareholders that want to be customers.
Social Proof: Nothing attests a bank’s value proposition like an actual case study. Highlight a customer that graced the bank with their business and explain how the bank helped them achieve their dreams and the story will create an emotional appeal that will reverberate throughout the year.
Go Virtual: Assuming you are in a state that allows a virtual meeting (more than half do), your charter documents allow it (if not, what a perfect time to change) and your corporate attorney approves it, consider going online using one of the many webcasting applications for a company like Broadridge (that also has best practice guidelines and safeguards on their site) that specializes in a digital platform just for holding annual shareholder meetings. To the extent your shareholders and directors are spread out, a virtual or hybrid meeting removes the friction to allow more participation. Further, an electronic format may also drive more engagement as companies that have conducted online meetings find the participation level goes up. More companies will follow the lead of Hewlett-Packard (online only), Intel (hybrid), Microsoft (hybrid) and others and take their annual shareholder meetings online. Look for banks to follow suit.
Say Good Bye to the Echo Chamber
Shareholder meetings can play a strong role in corporate culture and serve to increase the level of positive sentiment while increasing the number of buyers for your stock. While you don’t have to hold a pep-rally like Walmart or make your meeting a 3-day event complete with steak dinner and 5k run like Berkshire Hathaway, putting a little more energy into yours could result in a fun and more satisfying time - A time that might be more profitable for all attendees.
Submitted by Chris Nichols on August 31, 2015