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Treating Shareholders Like They Are Stupid is a Bad Idea

By Garrett Fisher
April 2, 2014

I am continuously amazed at the amount of entrepreneurs that treat shareholders like a burden, an annoyance, and as though the whole group is mentally deficient. What is interesting is that not every situation I have been exposed to fits that criteria; it’s either a healthy relationship with shareholders or the aforementioned antagonism. Curiously, every single situation that has had an antagonistic relationship between an entrepreneur and shareholders had incompetent management. Those that respected shareholders and valued them, while not being immune from rough patches, had a far more functionally successful enterprise.

It is fascinating that the arguments used by management regarding shareholders that they did not like were the same across completely unrelated enterprises that I was working with. Commentary was along the lines of “the shareholders are too simple to understand the business,” “they just want instant earnings,” and effectively “let’s do everything we can to make them go away.” Such statements are massive clues into management’s flawed thinking.

Shareholders are incredibly valuable partners. They obviously supply cash. Most importantly, they have a vested interest in the success of the company. If an individual has spare cash to invest in such a way, it is logical to assume that they are at the higher echelon of intelligence and business savvy. Their connections, wisdom, and advocacy are invaluable to any enterprise: whether a startup, growing, or mature and established. More advocacy, more customers, and more upside is almost always a good thing.

A second point of consideration is the words coming out of an entrepreneur’s mouth. Statements that shareholders are naïve, cannot or do not understand the business plan, or are shortsighted in profit demand imply that the entrepreneur is himself or herself the fool. Why accept investment from a naïve and demanding investor? If the business plan is not properly communicated to a shareholder, who is responsible for that? Such a behavior trend is indicative of an entrepreneur that prefers to pass responsibility on to others rather than accept it like a seasoned leader.

Entrepreneurs seem to forget that, the moment share capital was accepted, they sold a portion of their company and idea. Where it gets emotionally confusing is when the entrepreneur has packaged their personal vision and passion into a company and sold part of it. There are few things that feel more personal than how we see the world and how we propose to change it. Selling a portion of that before the dream is realized is a taxing proposition requiring emotional preparation. If that is something a person cannot handle, it is best to avoid bringing in shareholders – as the entrepreneur may see his or her idea one day taken out of their control, changed, and possibly finally sold off or shut down. That is the risk and reality of entrepreneurship.

A subtle battle is at play between both views of shareholders. It is effectively the opposing forces of short-term vs. long-term success. Taking inappropriate shareholders into a company to solve an immediate cash shortfall is a short-term view. Long after the alleviation of pain has taken place, new conflicts and issues will arise. The long-term view is to accept capital from individuals that see the long-term plan in the same way the entrepreneur does and are willing to endure short-term discomfort. The drawback that many have trouble accepting is that being straightforward about company prospects limits the potential shareholder pool.

A more controversial issue at play is why an entrepreneur would take a short-term route with company decisions. If that is his or her long-term approach to problems (as opposed to a particular crisis that has arisen), then said person makes a poor manager and ought to consider partnering with others to push a company forward.

Quite often, founders and inventors don’t make good managers or businesspersons. While an enterprise needs “founder’s passion,” it requires good management to survive along with a shareholders and bankers that are part of the team. Internal strife amongst the parties necessary to run a business simply does not translate into business success. Distancing and avoiding shareholders is a sure sign that the organization is heading into trouble.