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Small Investors Are Bigger Than You Think

Rich Daly shares his views with Forbes on why small investors are a bigger part of the shareholder equation.

This article appeared in the May 6, 2015 issue of Forbes

To borrow from Mark Twain, the death of the retail investor has been greatly exaggerated.

Recent data from the U.S. Federal Reserve shows that only 14% of U.S. households own individual stocks. To put that in context, as one news outlet did, there are more cat owners in the U.S. than retail investors.

But the number is misleading. Retail investors directly hold more equities than any other segment of investor, including mutual funds and hedge funds: $12.5 trillion in stocks, according to other data from the Federal Reserve. That means the small investor still has discretion over the single largest pool of equity capital in the world.

My firm, Broadridge, is deeply involved in the t-crossing and i-dotting task of administering proxy votes. We support investor communication services for virtually all U.S. companies and have the ability to “see through” brokerage holdings to the underlying details of how investors manage their shares.

According to our October data on “street” ownership of U.S. companies, retail investors owned more than 189 billion shares last year, nearly one-third of all shares on the market. When we look across the more than 5,000 U.S. companies that held annual meetings last year, it turns out that half of these firms were at least 46% owned by small investors.

So while the proportion of U.S. households that invest in stocks may be down, the small investor is most certainly not out.

Voting with their feet

As a group small investors may be bigger than you thought, but they are relatively unengaged with the companies they invest in. For example, they often “vote with their feet” by selling shares rather than making time to weigh in on matters of corporate governance through proxy voting. In our recent analysis, published jointly with PwC, we found that only 29 percent of the shares held by retail investors were voted compared to 90 percent of those held by institutional investors.

Given those numbers, it’s no wonder that three-quarters of investor relations departments say they do not actively court retail investors, according to a 2014 NIRI study. But for most companies this is a missed opportunity.

Long-term players

Retail investors play an important role in the market. They tend to buy and hold their stocks for a longer period of time than non-index institutional investors. In a world of high frequency trading, many retail investors are socking away stocks to fund their children’s college education and their own retirement.

Long-term investors are important to public companies. These stalwarts can help dampen stock-price volatility and provide a stable base of capital.

That makes small investors a class some companies consider worth fighting for. Apple AAPL +1.08%, whose shares are nearly 40% owned by individual investors, did a 7-to-1 stock split last spring, cutting its per share stock price from $645 to $92 overnight. CEO Tim Cook said he wanted to make shares “more accessible to a larger number of investors.”

A large, engaged retail investor base also has implications for corporate governance. With one-third of large cap board members reporting “extensive interaction” with shareholder activists last year, according to a 2014 survey by PwC, engaging a large base of retail shareholders can ensure that all voices are heard. When matters of corporate governance become contentious, higher participation from retail investors will more accurately reflect the sentiment of all shareholders.

Many companies already recognize that new technologies make it easier than ever to communicate with shareholders.  Some firms are using Big Data to better understand and target their investor base – as well as new digital communications platforms to improve participation and results. One leading firm saw retail voting participation rates increase by nearly 50% in some segments when it shared information and invited feedback on its business strategy and compensation philosophy.

Times are changing

When it comes to using technology to improve shareholder engagement, times are changing. More than two-thirds of all retail proxy votes – and over 95% of institutional votes – are submitted online today, compared to none two decades ago.  In the past year alone the number of retail shareholders who voted using mobile devices rose by 51% from a year earlier to over 1.8 million.

As tech-savvy Millennials file into the market and discover more convenient ways of voting their shares, expect to see retail investors getting more involved in the companies they own. That is good for companies, markets and the economy.

Small investors should be taken seriously. They are a bigger part of the shareholder equation than you may think.