By Lawrence A. Cunningham
Chocolate, champagne, wine, steak, discounts on hotels and cruises. These are some of the perks companies bestow on shareholders, along with free popcorn and charitable giving opportunities. While shareholders typically invest for financial returns, a select group of companies have long offered them perks to achieve various goals.
Brand promotion is one reason why Paris-based LVMH (Moët Hennessy Louis Vuitton) /zigman2/quotes/201350549/delayed FR:MC -0.36% /zigman2/quotes/202542535/composite LVMHF -0.88% offers shareholders special visits to its luxury goods facilities. Shareholders deepen their appreciation for LVMH’s brands on tours of the cellars where Hennessy cognac or Veuve Clicquot champagne are aged. For similar reasons, several U.S. vineyards offer shareholder discounts on wines and tastings, including Crimson Wine Group /zigman2/quotes/206890321/composite CWGL -0.92% in California’s Napa Valley and Willamette Valley Vineyards /zigman2/quotes/203866826/composite WVVI +0.48% in Oregon.
Many destination offerings grant shareholders credits, including cruise lines Carnival /zigman2/quotes/202325446/composite CCL -0.25% and Royal Caribbean Group /zigman2/quotes/208854639/composite RCL -0.67% and hotels Accor /zigman2/quotes/203800565/delayed FR:AC +2.56% and InterContinental Hotels Group /zigman2/quotes/204459500/composite IHG +2.74% . Other consumer companies have offered shareholders product gifts or discounts in attractively branded packages, including Ford Motor Co. /zigman2/quotes/208911460/composite F +1.62% and Kimberly-Clark /zigman2/quotes/201766540/composite KMB +0.02% .
Such shareholder bonuses not only build brand affinity, they invite shareholder loyalty to the company. Since shareholder rewards tend to be products or price discounts, they entice individual shareholders rather than institutions.
Evidence shows that companies adopting rewards programs gain significant shifts in shareholder bases from institutions to individuals. Management often prefers this, as individual shareholders are far more supportive of management proposals and incumbent directors than of shareholder activist proposals.
Voting turnout by individual shareholders has historically been low compared to that of institutional investors — about 30% versus 90%. Shareholder perks can induce shareholders to vote. For instance, Swiss chocolatier Lindt /zigman2/quotes/209002954/delayed CH:LISP +1.45% gives shareholders a box of its chocolates in exchange for voting on shareholder ballots. Bank of America /zigman2/quotes/200894270/composite BAC +2.88% increased its individual investor turnout three years running with the promise, prominently stated in its proxy statement , of donating $1 for every vote cast to such causes as the Special Olympics, Habitat for Humanity and the National Urban League.
Some companies recognize that individuals are more likely to vote when they also attend the annual shareholders’ meeting. Product discounts can draw attendance. At their legendary annual meetings, Toronto’s Fairfax Financial /zigman2/quotes/207415723/delayed CA:FFH -0.45% and Omaha’s Berkshire Hathaway /zigman2/quotes/208872451/composite BRK.A +0.96% /zigman2/quotes/200060694/composite BRK.B +0.91% both offer wide-ranging discounts on everything from insurance to household goods and entertainment. Tootsie Roll Industries /zigman2/quotes/200900273/composite TR -0.79% dispenses its famous candy at its annual shareholders’ meetings.
Many shareholder rewards programs recognize that brand strength and individual attachment increase with the size and duration of an individual’s ownership. Rewards therefore increase perk value based on higher ownership levels and longer holding periods. Japanese specialty foods company Wismettac (Nishimoto) /zigman2/quotes/203926677/delayed JP:9260 +1.66% increases shareholder reward value according to the number of shares owned at intervals ranging from 100 to 1,000.
If shareholder perks cater to individual shareholders, companies that end programs may reflect the growing power of institutions. Walt Disney /zigman2/quotes/203410047/composite DIS +1.18% earlier this year ended shareholder discounts on theme park admission, stressing a focus on traditional shareholder returns instead. Similarly, a few years ago when Churchill Downs /zigman2/quotes/205054336/composite CHDN -1.05% ceased giving shareholders free passes to its racetracks, it cited renewed focus on traditional shareholder value.
On the other hand, the boom in individual investing might herald renewed interest in shareholder perks. AMC Entertainment Holdings /zigman2/quotes/200235402/composite AMC +1.67% recently avoided bankruptcy thanks to large numbers of individual shareholders buying up the stock . As a reward, the company began giving shareholder-patrons free popcorn .
Beyond such freebies, some companies reward good shareholders with extra votes per share or higher dividends. A half-dozen U.S. companies such as Aflac /zigman2/quotes/208944541/composite AFL +0.36% and J.M. Smucker /zigman2/quotes/203835894/composite SJM +0.07% and a score of French companies including L’Oreal Group /zigman2/quotes/204720038/delayed FR:OR -0.11% /zigman2/quotes/203477983/composite LRLCY -0.30% and Air Liquide /zigman2/quotes/206822858/delayed FR:AI +0.59% /zigman2/quotes/209494120/composite AIQUY +0.73% , grant more votes to shares held for many years. Institutional investors have strong appetites for such bonus votes, since it augments their power. Other companies, such as Esker /zigman2/quotes/206820507/delayed FR:ALESK -3.55% , have begun to pay higher cash dividends on long-held shares. Individual shareholders have a stronger appetite for higher dividends rather than more votes.
Perks are no substitute for shareholder returns, but they have a place in the investor relations of many companies. Managers eager to attract loyal, patient, focused shareholders should consider giving the whole package — returns plus products, discounts, votes and dividends. Shareholders would eat it up.
Lawrence A. Cunningham is a professor at George Washington University, founder of the Quality Shareholders Group, and publisher, since 1997, of “The Essays of Warren Buffett: Lessons for Corporate America.” Cunningham owns shares of Berkshire Hathaway. For updates on Cunningham’s research about quality shareholders, sign up here.