Investor Relations

Getting to Know You

Looking for an exercise in frustration? Try finding out who owns your stock.
Lauren JohnMarch 1, 1998

Most executives in the throes of taking their company public are consumed with meeting the Securities and Exchange Commission’s stringent requests for the detailed financial information that, if deemed appropriate and accurate, will wind up in the hands of prospective shareholders. It’s only later, in the heady days just after the initial public offering, that many start to wonder just who those shareholders are.

Consider the experience of Fritz von Mering, CFO of Boston Communications Group, a $122 million company that provides billing and customer information services to the wireless telecommunications industry. “Before we went public in June 1996, we knew a lot about three important groups of people: our customers, our employees, and our vendors,” von Mering says. “But after the IPO, when we wanted to know more about a fourth group–our investors–we came to a screeching halt.”

Von Mering is not alone. Thanks to myriad SEC rules and a well-guarded sense of privacy among investors, financial executives at public companies are denied direct access to individual shareholder identities–information they contend would allow companies to be more proactive in investor relations and aid them in competitive intelligence.

“I want to know why shareholders have invested, how much they have invested, and who the long-term holders are,” says von Mering. “I want to know what they are hearing that we haven’t heard.” In the end, he adds, “we obviously want to get the right message across to investors who will buy and hold.”

To do that, von Mering says he would like to have shareholder information in real time. After all, if his investors can have real- time access to his company’s stock price, why shouldn’t he have real-time access to them? “We don’t watch the ticker every hour of the day,” he says. “But, it does fluctuate a lot since we have a lot of volatility as a small-cap stock. And when investors are trimming their holdings, I want to be able to pick up the phone and call them.”

Frustrated by the lack of shareholder information, von Mering and many of his counterparts are taking matters into their own hands. Some are hiring investor relations firms that specialize in smoking out stockholders; others are using the Internet and intranets to communicate directly with stockholders, particularly employees. Still, the question remains, Should public companies have access to any of this information?

Knowing who your investors are and when they are investing is “a complicated public-policy issue with a lot of trade-offs,” says finance professor James Brickley of the University of Rochester’s (New York) William E. Simon Graduate School of Business Administration. As for how much senior finance executives themselves should know, Brickley says, “Finance theory would tell you that the CFO’s top priority should be to maximize shareholder value by investing money wisely and structuring the firm’s financial reporting systems efficiently. It might be less necessary for the CFO to know the intricate preferences of the shareholder base.”


While it’s natural to suspect that the SEC wants to keep public companies in the dark about stockholder ownership, the truth is that the policy is more accident than design. “Today’s puzzle of ownership is the result of a gerry-built system that has become more complex in the years since the first securities laws were passed in 1934,” says John C. Wilcox, chairman of investor relations and proxy solicitation firm Georgeson & Co., in New York.

Back in the 1930s, no one could have predicted the creation of mutual funds or 401(k) benefits plans. At the time, there were no sophisticated money managers or companies like Fidelity and T. Rowe Price. And there were no institutional investors, such as state, municipal, and union pension funds. The result of such innovations, however, “is a new class of shareholder–the intermediary shareholder–that is harder to identify,” says Wilcox.

To compound matters, there is no one comprehensive source of shareholder information. Instead, such information must be gleaned from a variety of SEC documents filed at different times of the year, says SEC spokesperson John Heine. And forget about real time, he adds, since many of the SEC filing rules were enacted before advances in technology made real-time information so accessible.

Consider, for example, the 1968 Williams Act amendments to Section 13D of the 1934 Securities Exchange Act. The 1968 revision requires an individual or group investor to reveal itself within 10 days of having acquired 5 percent or more of a company. While in 1968 a 10-day grace period may have seemed reasonable, securities lawyers have been grumbling that 10 days are now too many.

Even worse are the delays involved in issuing 13F SEC documents, a key source of information for those tracking large-scale institutional investments. In many cases, this form, filed by institutional managers managing more than $100 million in equities, does not become publicly available until two months after the end of each quarter. Part of the problem is that money managers are granted 45 days after the end of each quarter to file these documents.


SEC rules notwithstanding, many investors simply prefer anonymity. “Trading isn’t and never will be completely transparent,” states Ron Schneider, director of shareholder management services for the Financial Relations Board Inc., an investor relations and stock surveillance firm in New York. One reason is that “with more and more people investing, and so many people and institutions relying on professional management, the trend increasingly is for shares to go into street name,” says Schneider, adding that such names are used to camouflage actual institutional and retail owners.

Ironically, however, a liberalization of SEC policy now enables companies to learn more about the investors behind the street names. The policy change, explains Wilcox, came in 1983 as a way to help companies respond to an unprecedented wave of shareholder lawsuits and activism. As part of a series of new direct communications policies passed that year, the SEC ruled that companies could ask brokers to identify their retail clients, provided these retail investors did not object. Under the law, such investors were considered nonobjecting beneficial owners (NOBOs).

Over the past decade, companies have used NOBO lists to contact many of these shareholders directly, generally in relation to proxy votes. In fact, because many individual investors neglect to check off the box indicating that they would like to protect their privacy, by default most broker-retail clients today are NOBOs, says Schneider.

Small wonder that deciphering street names and contacting NOBOs have become a lucrative side of the investor relations business. And firms such as Georgeson and the Financial Relations Board, which can command six-figure retainer fees, use proprietary databases, proxy records, and other research tools to get behind the generic bank and broker custodian names. “We do in-depth monitoring of ownership changes for about 250 clients,” says Wilcox. “It is this type of information, rather than the day-to-day trades, that CFOs are most interested in.”


For companies not willing to make that investment, technology has created a multitude of investor communications opportunities. “There’s no question in my mind that the Internet is creating a broader audience of shareholders,” says Bob Rankin, chief financial officer of DeCrane Aircraft Holdings Inc., a $100 million aircraft components manufacturer based in Los Angeles, who is currently studying ways to harness its power.

Douglas Klein, CFO of $50 million consumer electronics company Go-Video Inc., in Scottsdale, Arizona, on the other hand, is already able to develop a more accurateinvestor profile based on the types of inquiries he gets through direct E-mail correspondence. “These days, I get more and more communications from shareholders this way, and I am equally respectful to all of them, even though I don’t know how many shares they own,” says Klein, adding that about 90 percent of his shareholders are individual retail owners. “In fact, the joke around here is that everyone in street name tells us that they own 100,000 shares,” he says.

Klein says that should his company ever have a larger percentage of institutional investors, shareholder identification would become even more important to him. “Institutional investors are the Holy Grail, but the downside is that they often follow the same investment practices as a herd,” he says. CFOs who know who these investors are can begin to do the hand-holding needed to block a stampede.


But while the technology may enhance communications with those who actually want to be reached, some analysts expect a backlash. And barring major changes in SEC policy and procedures, shareholder targeting could become even more difficult.

“Individual investors and money managers have always wanted privacy, and technology won’t change that,” says Harvard Business School investment banking professor Samuel Hayes. If anything, he adds, the security issues that have developed as more and more people do business on the Internet have elevated privacy issues in the minds of investors. Even chief financial officers are sensitive to this dilemma. Allen Dunaway, CFO of OrthoLogic Corp., a Phoenix-based medical products company, admits: “If I were a money manager these days, I wouldn’t want people to know which stocks I was trading.”

Meanwhile, economists warn that making stock trade information available in real time could inhibit trading overall. Finance professor Clifford Smith of the University of Rochester Graduate School of Business Administration, explains it this way: “Let’s say that I could monitor, on a real-time basis, all the trades done by someone like, say, Warren Buffett. I wouldn’t have to invest any time in research; I wouldn’t need a lot of market knowledge. I could simply watch Buffett or another savvy investor amass a position. Then I’d be able to duplicate it with very little effort, driving up the stock price in the bargain. If we change the rules that make trading activity more transparent, people who are very good at it are going to do less of it because there will be less opportunity for them to profit.”

Adds University of Rochester professor James Brickley, transparent trades would reduce the profit incentive for investors interested in taking over poorly run companies. And that, he says, would be bad for the economy as a whole.

Again, some CFOs are sympathetic. “I might not like the way the system is set up, but I understand the reasons for it,” concludes John Crawford, CFO of Corvis International Inc., a San Diego biotechnology firm. “I think there is an appropriate tension between the CFO’s need to know who owns the company’s stock and the investing institutions’ need for confidentiality. Investors need time to take a position.”


Whether CFOs learn about shareholders by perusing SEC documents, hiring outside firms for analysis, or fielding investor telephone calls, one thing has become clearer: Finance executives are going to spend an increasing amount of time communicating with shareholders.

CFOs Crawford, Klein, and Rankin, for example, estimate that they spend as much as 20 percent of their time communicating with stockholders. And Forrester Research Inc., a Cambridge, Massachusetts, consulting firm, predicts that total assets handled through online mutual fund transactions will reach 173.5 billion in 2001, up from 41.9 billion in 1996. In other words, companies already struggling to identify the retail investors hidden behind street names are going to have even more of those investors–and they will be moving in and out of the market more quickly than ever before.

Yet, barring an act of Congress, SEC filing rules are not likely to change, says spokesperson Heinz. And no group is lobbying to do it. “I’d be surprised if there were pressure to shorten any of the reporting time periods,” he adds.

What has changed is the sophistication and speed with which both large and small companies can analyze and make projections based on the limited amount of shareholder information available, says Georgeson’s Wilcox. For many, that’s small consolation. “As a company founder, I’ve watched our stock from the start and tracked it from the start,” says Corvas’s Crawford. He estimates that he knows who about 80 percent of his shareholders are. But, he adds, it is a lot tougher for those executives who take over in the middle of a public company’s life span. “Most CFOs are lucky if they know where half their stock is,” he concludes.

Lauren John is a freelance writer based in Palo Alto, California.