Why is it important for a company to satisfy its shareholders? What difference does it make for a large company if shareholders are unhappy and sell their shares since they have already been issued and paid for? Similarly, when you buy a stock on the secondary market, the money goes to the person selling it, not to the company. Am I right ?
Yves Filiatrault
Theoretically, it changes absolutely nothing for a company that the price of its share on the stock market fluctuates.
This assertion can, however, be nuanced because the personal enrichment of managers – and sometimes of a large number of employees – is linked to the value of the company’s stock. Workforce compensation in public companies is often partly in shares and stock options.
You should also know that one of the elements encouraging a company to list on the stock market is to be able to take advantage of an exchange currency (the company’s share) to finance activities, projects and potential acquisitions.
Thus, a company can decide to issue new shares to obtain capital when it wishes in order to support it in the execution of its strategy. If its stock is depreciated at a time when it needs to, it will have to issue many more shares than if its stock market valuation were more favourable.
There is therefore a greater risk of dilution for shareholders when raising fresh capital.
A fall in the stock price can also have a regulatory impact. Index funds could drop a stock massively if it no longer meets certain price criteria, which could put additional pressure on a company’s stock.
Having a high market value also brings interesting visibility to a company and can help attract and retain talent.
On this subject, observers will say that some leaders will see a more attractive opportunity for gain by joining a company with a depreciated value. As long as the company has potential and interesting prospects, of course.
Satisfying the shareholders is also important in the sense that the latter vote each year to elect the members of the board of directors of a company. Elected directors are those who hire and fire the CEO of the company. Hence the importance of a good team of managers to gain investor confidence.
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