The Public’s Influence on Stock Markets: Part 3
Increase in the level of analysis available
Coupled with the increasing ease of global communication, we have seen a concurrent rise in the level of available analysis on individual companies, stock markets, stock trends, investing strategies – the list is endless. Individual investors now have far greater information than ever before, allowing them to make better decisions.
The rise of activist and institutional investors
Here we have seen several levels of activism, from the activist hedge funds run by investors such as Carl Ichan looking to make strategic changes to management and strategy, to individual or groups of investors looking to amend corporate pay. I can hear readers berating me as I type: 'These people aren’t the public; how can they be relevant'?
The investors often making the representations to companies may well be institutional investors representing their members. However, those members are the public, as the institutional investors are not only banks but also insurance companies, pension and mutual funds, to name a few. As individuals we are (or should) all be investing in such funds either through employer pension schemes, personal pension plans, insuring assets or planning for our future by using investments.
Due to sheer volume of investors, the individual choices we each make about where we invest could affect the stock market. If we decide we wish to invest in one company but not in another due to their investment strategies, then the major investors will look to change their investing strategy so that they do not lose business. What may be theoretically possible may not happen in practice. In fact, most indirect investors and even those who actively buy specific mutual funds will often not be aware of specifically where their money is invested.
There has, however, been a rise in ethical and green investing and also in Islamic finance where investment types are bound by pre-set rules, but on the whole, we have yet to see investors rising up to influence firms in mass activism.
The power of consumers
As VW found out following its emission scandal in 2015, the consumer can vote with their feet and whilst there has since the scandal been an increase in sales as memories fade, the initial effect on the share price was substantial.
Changes in director and management reward
The small number of people who have strategic and management power in listed companies are also members of the public, i.e. they are part of the community as well as doing their 'day job'. Historically, director and management rewards concentrated around cash. However, in a bid to decrease short-termism in decision making and agency problems, there has been a move to increase the use of rewards linked to share price through having partial payment in shares or share options. In this case, even where it is potential only for the period they work for the company, as individuals they watch and influence share prices.
Overall, despite the first thoughts about disparity in size, there are ways in which the public can influence the stock market. Such influence remains today in the hands of relatively few members of the public but, with increasing levels of communication, ever increasing levels of analysis available to investors, an increasing consumer awareness of ethical investing and corporate social responsibility and the ability to influence by the power of their invested funds, it is likely this influence will grow in the future.
About the authors: Michelle Hardy is a senior lecturer and module leader for several key modules on a variety of finance and international finance courses at Sheffield Hallam University. Her background is corporate banking and international wealth management for 14 years. She is a fellow of the Institute of Chartered Accountants in England and Wales.
Ian Pagdin is Course Leader for Banking & Finance Masters and a variety of finance and international finance courses at Sheffield Hallam University. His background is finance, having worked in the finance industry for 22 years, including 19 years as an independent financial adviser.
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