Power in Diversity: How Cocktail of Investors Drive Firms’ Performance

Bayo Adams

In the face of an increasingly volatile global economy, Nigeria has seen increased investor interest due to its economic potential and growing market. Nigerian firms now face challenges such as economic uncertainty, regulatory hurdles, and intense competition. The impact of investor diversity on firms’ performance during economic uncertainty is still debated.

However, research indicates that investor diversity can significantly enhance firms’ performance. This article reports on the study of how a diverse investor base can improve decision-making, mitigate risk, and drive sustainable growth in publicly traded Nigerian companies.

Diversity isn’t just a trendy term; it’s a crucial element for better decisions and outcomes. When it comes to investors, diversity means having a mix of institutional investors, like banks, hedge funds, pension funds, and foreign direct investments, alongside individual retail investors—domestic and foreign. This mix brings in a variety of perspectives and resources, creating a strong financial foundation for companies.

A diverse mix of investors helps reduce the risk of investors selling off the securities of the company at any particular time. A company with different categories of investors is less susceptible to steep declines in market value than one which does not have such a mix of investors. Investors could influence corporate behaviour through activism or just their scrutiny of the actions of corporate managers. Institutional investors often bring in large capital and are more stable, while individual investors can add flexibility and responsiveness to market changes. This combination can be particularly beneficial during economic uncertainties, allowing companies to navigate tough times more easily.

With a GDP of over $370 billion, a population estimated at over 200 million, and an abundance of natural resources, Nigeria should be a magnet for foreign investments. However, Nigerian companies face significant challenges, including political and economic uncertainties around foreign exchange rate policies. This study looks at how these companies, listed on the Nigerian Stock Exchange (NSE), cope with these challenges, focusing on the influence of diverse investors.

Nigeria’s economic landscape is dynamic and often unpredictable. The country is rich in natural resources and has a large, youthful population, which presents vast opportunities for growth and development. However, political instability and fluctuating economic policies, especially concerning foreign exchange rates, create a challenging business environment. Companies need a robust and diverse investor base to ensure stability and sustained growth.

The study examined 52 of the companies listed on the Nigerian Stock Exchange (NSE) to see how investor diversity, economic uncertainty, and firm performance are connected. Here are the key takeaways:

While the benefits of institutional investors abound, the study revealed that having institutional investors alone did not significantly boost company performance during economic uncertainty. This indicates that while these investors bring considerable resources, their impact might be influenced by larger economic conditions.

Institutional investors, such as banks and pension funds, often significantly influence a company’s strategic decisions due to their substantial investments. However, their focus on long-term stability and lower risk tolerance might limit their ability to respond swiftly to economic changes. This could explain why their presence and influence alone does not necessarily translate into improved performance during uncertain times.

Companies run by their owners performed better during uncertain times. Owners who manage their businesses are more invested in their success, leading to more strategic and committed decision-making. Owner-managers have a personal stake in the business, which drives them to make decisions in the company’s best interest. Their deep understanding of the business and its market allows them to navigate challenges more effectively. During economic uncertainty, their ability to quickly adapt and implement strategic changes can be a significant advantage.

Diverse investors promote accountability and transparency, leading to stronger governance structures. Stakeholder engagement in Nigerian enterprises shows that varied investor interests drive companies to adopt better governance practices. Investor diversity, especially institutional investors, shapes corporate governance frameworks.

Institutional investors can influence management decisions and policies, enhancing corporate governance. Multiple factors, including diverse investor interests, can push corporate governance systems towards more effective practices.

Based on the findings, there are several practical tips for Nigerian companies and their stakeholders to leverage on:

• Engage Owner-Managers: Encourage owner-managers to take active roles in management, leveraging their expertise for better performance. Their investment in the business fosters accountability and drives decisions that enhance organisational success, especially in uncertain times.

• Balance Investor Types: A mix of institutional and individual investors, including owner-managers, is essential. Institutional investors provide stability and capital, while individual investors offer flexibility. This diversity helps companies navigate economic uncertainties effectively.

• Improve Communication: Develop robust media strategies to communicate company strengths and plans, boosting investor confidence during uncertain times. A strong information system for monitoring government policies allows for timely adjustments in response to changes.

• Strengthen Governance Structures: Strive for a diverse board of directors to foster innovative solutions and improved decision-making. Clear policies outlining roles and responsibilities enhance accountability and help navigate challenges effectively.

• Leverage Technology: Invest in data analytics to understand investor behaviour and market trends, informing strategic decisions. Utilise digital tools like virtual meetings and online forums to enhance investor engagement and address concerns.

• Focus on Long-Term Sustainability: Prioritise environmental, social, and governance (ESG) practices to meet the growing demand from investors for sustainable operations. Adopting these practices attracts a broader range of investors and supports long-term success.

In light of the study’s findings, firms, the organised private sector, and regulators in the Nigerian economy should take proactive steps to enhance the diversity of their investor base. This may apply to other emerging market countries, where firms can open up shareholding and management to accommodate various investors while leveraging the benefits of owner-managers with relevant expertise. This study lays the foundation for future research on how investor diversity impacts specific sectors, such as technology and manufacturing, and provides deeper insights into its influence on firm performance.

Conclusively, investor diversity is essential for enhancing company performance during uncertain times. For Nigerian publicly traded companies, a strategic mix of investor types and active owner-management fosters resilience and sustained success. Attracting diverse investors and encouraging owner-manager involvement can improve performance and enable firms to capitalise on opportunities. As the economic landscape evolves, these strategies will help businesses remain competitive and achieve long-term growth.

 –Bayo is a Doctoral Candidate with the Hult International Business School and Lead Consultant at Periscope Consulting Ltd. He is a management consultant with over 15 years’ experience in Strategy, Management and Finance.