The best-performing stocks over the last few years have consistently included technology businesses – from Microsoft and Apple to Amazon and Netflix. More recently, industry giants like Broadcom and Nvidia have enjoyed tremendous growth in their share price, with such industry giants representing a great opportunity to grow capital.
There’s arguably an innovation slowdown underway, however, particularly among device manufacturers. The rising popularity of second-hand smartphones, for example, can be explained both by the cost of flagship devices as well as the fact older handsets are still functionally identical.
As society’s appetite for the latest technologies slows, shareholders continue to place manufacturers under intense pressure to innovate in order to spark sales. Indeed, shareholders often have a significant influence on the direction of a company. They stand to gain – and lose – the most with every passing quarter, and businesses need to maintain a healthy and trusting relationship with their shareholders to see their ideas for new technologies through.
Are shareholders a help or a hindrance?
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Investors have a huge hand in the creation and maintenance of a profitable business, explains Jonathan Hunter, CEO of AIM-listed Eleco. “If you take the build tech sector, there's a huge amount of businesses entering the space that need capital, they need investors and shareholders to be able to enter the market and expand when they need to,” he tells ITPro.
“Having shareholders own part of the business means they can provide their views, vote if they agree or disagree with the direction of the business, or – as a last resort – sell their shares and move on. As a result, it’s important for executives in the business to be open and transparent with all stakeholders, communicate, and set those expectations so that investors can make sound investment decisions.”
A decision to withdraw money may be drastic and only occur in extreme circumstances, but it can seriously impact the business. As David Newns, Entrepreneur and Investor details, managing shareholder expectations has wide-ranging consequences throughout the business.
“Public companies have this real challenge of balancing the running of their business with what is essentially a promise to shareholders,” he says. “As someone running the business, if that promise looks like a challenge, you will do anything to deliver on that, because that is your job.
“If that means cutting short-term or long-term investments, that is definitely something you would consider. If a business decides to half the R&D team, they may not have a product to launch for five years, but at least some people can keep their jobs.”
Managing shareholder expectations
Job cuts are part of the process of managing a business. After all, the balancing of the books comes before uncomfortable calls with shareholders.
Nevertheless, these are unsavory aspects of doing business, and don’t look good whatever way you spin it; all that spinning doesn’t change the fact shareholders can withdraw their money.
To negotiate this, Hunter advocates for an open policy of clear communication, adding “you have to treat all shareholders the same”.
“Fortunately, a lot of shareholders think long term so they know and understand companies better, and we find that new investors that are joining will meet a couple of times first before taking the holding,” he continues. “It's important to build trust which boils down to management. Communicating effectively as well as delivering on the things that have been committed to develops that trust.”
When ideas run out of road
Communication and building trust can only get so far though. There are several examples of shareholders in the tech industry losing faith in the direction the company is going.
From the moment Twitter became a publicly traded company to the moment Musk carried a sink into HQ, monetization has been a topic that has dogged the company. Similarly, Meta’s quest to build the metaverse has taken a backseat due to the investment this project demands, as well as the turmoil its advertising business was facing.
Such moves from companies make shareholder value a dirty word, and headlines and opinion pieces criticizing tech giants for not staying the course only add to the discontent. As Newns explains, though, Meta’s metaverse u-turn demonstrates there has to be a cut-off point when it comes to investing in new technologies.
“When Mark Zuckerberg said the future is in the metaverse and then spent a lot of money trying to chase this opportunity, initially everyone was interested and gave him the space to pursue it,” he says. “A number of years, and a lot of billions later, the reality is nothing much was happening. But at the same time, the core business was under threat from lower consumer spending and ad revenue decreasing.
“I think actually Zuckerberg got a lot of leeway when it came to the amount of money and the amount of time he spent on the metaverse and, at the end of the day, I think the decision to step back was more to do with the metaverse, rather than how they innovate as a company.”
How shareholders influence innovation
With shareholder value often prioritized above all else, many feel products the companies are developing begin to lose importance. This raises fundamental questions over whether this is affecting the overall health of the industry.
Although shareholders pulling their money can obviously halt innovative practices, Newns says the activity of investors is actually a reflection of the sentiment in the market. “The synthetic meats market is an example of the sentiment dropping out of the market and prime investors asking ‘If there are no requirements for this stuff, why would we invest?’
“I think that’s happening to the metaverse now, and that affects everyone in the ecosystem down to the startups. But, equally, if you're developing a ChatGPT solution, then everyone will want to invest. So it's a moving piece with lots of factors.”
Hunter adds being able to communicate the value of the company and the direction it’s going in is at the heart of reassuring shareholders. “It’s up to the investor as to whether they will stay or leave,” he says. “As a business, we have a responsibility to communicate the value that we're adding to the business and why we are making the decision we do.
“It’s about communicating across a broad audience. For example, we made a divestment this year because the business that we divested was not adding value and wasn't part of our strategic roadmap.
“Because we communicated this with our investors, what could have been seen as a negative was well received by shareholders.
