Can a Company Be Too Good to Shareholders?

Shareholders can be treated too well -- yes, it's true.

Jamal Carnette, CFA
Jamal Carnette, CFA
Dec 30, 2015 at 11:04AM
Technology and Telecom

Paul Tudor Jones II's Just Capital aims to highlight companies that focus on more than Wall Street's quarterly demands. Wise investors should already do this. Image source: Just Capital.

Income and wealth inequality are the prescient economic issues facing Americans today, with virtually every poll putting this issue at the forefront of their minds. And while that is to be expected for lower- and middle-class Americans, the issue now has prominent billionaires rethinking the current construct.

Early Amazon (NASDAQ:AMZN) investor and aQuantive founder Nick Hanauer wrote an opinion piece in Politico succinctly titled "The Pitchforks Are Coming...For Us [sic] Plutocrats." Warren Buffett and Donald Trump find themselves on the same side of the "carried-interest loophole" issue, as both feel it should be closed.

Perhaps one of the biggest beneficiaries of this favorable tax designation, hedge fund billionaire Paul Tudor Jones II, agrees with these three billionaires in a New York Times piece. His newest undertaking, Just Capital, aims to create a benchmark for companies by comprehensive performance including how socially responsible it is and how it treats its employees.

Arguing against what he calls "shareholder hegemony," the dominance of shareholders over all other stakeholders has enriched the rich at the expense of all others. The interesting thing, however, is the leaders who have essentially ignored Wall Street demands are the true business leaders who have flourished this century.

Amazon has done well by ignoring short-term demands from Wall Street
As the CEO of a company, you are acting as an agent for shareholders, but the real leaders have succeeded without extreme shareholder hegemony. For 2015, the best example of this leadership in action is's Jeff Bezos, as shares of his company have increased nearly 120% this year alone. Long faulted by Wall Street for the company's thin -- seemingly unnecessarily so -- margins and spending on unrelated, non-core operations, many question the long-term value proposition of the e-retailer.

And while a few of those "moonshots" have been abject failures, like the Fire Phone, the company's huge run-up in 2015 was based in part of profitability from the company's newly disclosed Amazon Web Services division, as it has a much-higher margin profile than the company's retailing operations. If Wall Street's myopia was indulged, it's very possible non-core activities like AWS would have been passed aside in favor of an expanded profit profile.

Steve Jobs was more focused on products
In the pantheon of 21st century CEOs, Apple's (NASDAQ:AAPL) Steve Jobs stands above all others -- and rightfully so. After returning to a company he was unceremoniously ousted from, he came back to right the ship and produce the longest mobile-Internet product supercycle, starting from the iPod and ending with the iPad.

And there was a reason for this: Jobs was considered a product expert and placed user experience above all else, including shareholders. At best, Jobs was indifferent toward shareholders. At worst, antipathetic.

By the time Steve Jobs took a medical leave of absence, many on Wall Street were clamoring for the company to return its growing cash pile that totaled nearly $60 billion at the time. New CEO Tim Cook has been more traditional in his relationship with shareholders, and has done well monetizing Apple's devices, but many shareholders would like Jobs' product-focus back as Wall Street is increasingly predicting a rough path forward for the iPhone.

A new-generation leader
It's not just the baby boomer generation that has forward-thinking business minds: Facebook's (NASDAQ:FB) Mark Zuckerberg has shown to be incredibly adept at running his company. After a botched IPO faced the company to address tough questions --most notably its lacking mobile monetization strategy -- shares have rallied more than 400% since the sub-$20 nadir it experienced in 2012.

That low point was, in part, due to Wall Street souring on the company's plans to acquire the mobile photo-sharing service Instagram for an agreed-upon price of $1 billion and the issuance of stock to affect the transaction. The falling stock price dropped the amount the company paid for Instagram to $740 million.

And while Instagram produced no revenue at the time of purchase, it's been an integral part of Facebook's mobile strategy and will begin to pay massive dividends going forward, as the service has 55.4 million monthly unique users and is growing at a 23% clip. In the end, ignoring Wall Street should lead Facebook's investors next leg up in users and ad-based revenue.

Just Capital's aim is laudable, but investors should reward long-term CEOs anyway
Income and wealth inequality are multifaceted problems, and there are no easy solutions to reverse the trend. Personally, I applaud Tudor Jones' Just Capital for attempting to shine a light on this issue. Part of the issue is shareholder hegemony -- low/no-vision CEOs more focused on Wall Street's whims more so than visionary strategies. Excessive dividends and buybacks funded by cutting back on research and development and increasing levels of debt should be harshly scrutinized by investors -- not encouraged.

In the end, shareholders should ask themselves if they want to entrust their investing dollars on a CEO more worried about massaging quarterly earnings, only to have the collective metonym of Wall Street asking for these results to be beaten next quarter -- eventually creating an intractable situation or in CEOs like the three above who are interested in the long-term success of their companies over next quarter's results.