Companies often issue additional shares to raise money. If the share price is high, they can raise more money more easily. If the market is confident that management can put this new money to good use to increase profits, they will be successful selling more shares at a high price.
Most senior management is paid with a combination of cash, bonuses, and stock options. As the stock price rises, the value of management’s stock options rise. Bonuses can also be tied to company performance.
There is little chance that the stockholders of a mega-corporation could vote out the board. Fund managers who control most of the shares would rather just sell the shares and invest in a better company than get involved in trying to manage a company. Individual shareholders are just too diverse to organize into a corporate revolt. And a lot of companies have installed various safeguards against shareholder revolts, such as staggered board terms. Maybe the shareholders at Bailey Bros. Building and Loan Association can oust the board, but it’s not terribly likely at Apple.
According to Wikipedia, The Dutch East India Company was the first company to issue stock. It was founded in 1602 and paid an annual dividend of more than 18% for more than 200 years.
dafuq are you talking about? The Dutch East India Company was paying dividends as early as the 1620s. (And very high dividends at that.) Standard Oil was famous for its massive dividend payouts in the 1890s. In one 20-year span they pad out more than half a billion dollars in dividends. In fact, until the conglomeration era of the 1960s, many companies sought to create shareholder value primarily through dividends rather than increasing stock prices.
I have to believe (and other posts back me up on this) that dividends have been paid for as long as there have been corporations. It was originally the whole purpose of buying stocks.
Nowadays dividends seem to be the exception rather than the rule, and people buy stocks without consideration of dividends but rather with hopes that they can later sell them at a higher price. This makes the whole thing into something almost like a Ponzi scheme, where there’s no real value other than what someone else is willing to pay for it.
Without dividends the whole thing is one big casino.
I’ll just note that while there are many companies that don’t (and don’t plan to) pay dividends, many investors (including yours truly) actively seek out companies with good dividend yields. And there are plenty to be found.
Ok, Halman, let’s do it your way (despite the fact that management likely are shareholders themselves, owe a fiduciary responsibility to the shareholders etc.) and have management say “fuck you” to shareholders. Not just one company, but pretty much all of them (otherwise, things still don’t change, right?). Now the next Steve Jobs comes around, and invents or steals the next awesome thing. All he needs is 30 million to build a factory and hire some people. In your system, he’d best start playing the lottery, as he won’t find investors. And we’ll never see that next awesome thing.
Also, the management of all those companies? They’d like to expand. Can’t sell shares, so they go to the banks. The banks ask them, “hey, didn’t you just royally screw all your shareholders? That doesn’t exactly fill us with confidence. K tnx bye”
Management screws shareholders all the time. Those big paychecks come right out of the bottom line, in some case they are a high percentage of the profits for a year.
Many shareholders hold shares for fractions of a second. If the stock is moving in the direction investors like, they are fine with whatever the management does.
If screw the shareholders means the stock price goes down, then I agree with you. Pretty much anything else, no.
Most high-frequency trading is done with options, not equity shares. The majority of equity shares are held for the long-term by large institutional investors.
Upper management often owns a lot of stock, and their bonuses and performance incentives are also often paid in company stock. “Keep the shareholders happy” is usually code for “CEOs, VPs and executives do what’s financially best for themselves, personally”. The owners of the company like it that way because they’re in the same boat.
The real divide is between long-term stockholders, like the founder who still owns 49% of the company, and early employees who are sitting on a lot of stock options until retirement, versus the market investor who doesn’t care if the company goes bankrupt in December as long as they have a big quarter in March.
I’d argue that “good” companies (as defined by those with happy customers, and those companies which respect the environment, their employees, the economy, etc) usually take the long view. Companies we all hate for outsourcing, selling (and dumping) garbage, and treating their employees like slaves are often the short-view, quarterly-profits-over-sustainability type. Chalking it all up to “keeping shareholders happy” obscures the distinction. Which shareholders?
Halman sees no need to worry about shareprice, which is what I was referring to. No question there’s some pretty cynical management out there, but Halman appears to look for a system where management ignores shareholders and share price as a matter of principle, in favor of other, apparently more pressing concerns.
Well, the actual shareholders - as in those owning the shares. Distinct from stakeholders, which includes customers, neighbors, employees, suppliers etc., as well as shareholders.
While there are concepts such as socially responsible investing, the most common way to keep shareholders happy is return on investment, through appreciation of the share-price, dividends or some combination thereof. Long term buy-and-hold investors will likely see management being mindful of other stakeholders as a likely aspect of long-term success.
The OP is correct that it’s possible that stockholders will decide to just milk a company dry. They’ll just tell the board to pay them as much as possible in dividends until the company goes broke.
The problem with this plan is you’ve got to buy the stock before you collect the dividends. If you’re just draining the company, it’ll probably go broke before it pays you enough dividends to make up for the cost of the stock.
So it makes financial sense to think more long-term. Instead of trying to collect as much dividends as possible as quickly as possible, you plan on collecting a steady stream of dividends on an ongoing basis year after year. Or you figure on making a profit by having the value of the stocks go up so you can sell them for more than you paid for them. Both of these strategies mean you have to put some thought into the long-term existence and development of the company.
There are plenty of examples of management voting themselves big raises and bonuses despite a tanking share price. And even in good companies share prices are relative to the market - CEOs did not go payless in 2009 when most of their stock prices sank.
If it is bad enough for long enough and you piss off some real set of powerful board members, then you are in trouble. Just look at that beacon of good corporate governance, HP.