How Retail Investing Improves Corporate Governance and Benefits Society
Since 2020, new retail investors have flooded the securities markets, opening a record number of new brokerage accounts. Due to the ease of investing through commission-free trading apps and the ability to purchase fractional shares, a broader segment of the population is beginning to partake in direct investing. A 2020 FINRA-NORC study of new retail investors found that there has been an increase in the racial and ethnic diversity of new investors. More specifically, new investors in 2020 were 58 percent White, 17 percent African American, 15 percent Hispanic/Latino, and 10% percent Asian. By contrast, a 2019 study found that retail investors were 63 percent White, 12 percent Black, 15 percent Hispanic, and 8 percent Asian.
In addition, more women have been drawn to direct investing and now account for 37 percent of new investors compared with just 17 percent of experienced investors. The door has even opened for individuals with lower incomes to participate with smaller investment amounts. The FINRA-NORC study found that just under a quarter of new retail investors earn less than $35,000 a year while only 28 percent of new investors earn more than $100,000 and that 33 percent of new investors’ accounts hold balances of less than $500. Finally, new retail investors tend to be younger, with 51 percent Millennials and 16 percent GenZ’ers in 2020. The increased diversity of retail investors has expanded the segment of society holding voting rights in corporations.
In a new paper, we explore how the power of retail investors can result in gains not only for corporations but for society. Traditionally, affluent, older white men have held most of the power over corporate governance. A more diverse shareholder base can leverage the considerable power of corporations, which some have compared to that of nations, to pursue environmental and social causes and achieve unprecedented results.
Retail investors’ effective engagement with the corporate sector requires a corporate governance infrastructure that allows shareholders with granular interests to participate in decisions at minimal costs. Approaches such as a forum for shareholders to interact with each other and with the corporation would facilitate information gathering and year around engagement. However, only a shift in the social norms that govern investing would prompt a fundamental change. Such a shift is possible when a large, broad, and diverse base of shareholders exercises its voting rights.
A larger swath of society participating in corporate governance would allow the corporate sector to better reflect society and respond more quickly to the changing needs of the world. Moreover, since retail investors are human, their greater participation in corporate governance would bring personal and moral qualities into corporate decision making.
For corporations that offer products and services to retail consumers, having a large base of retail investors comes with additional benefits. Retail investors can become consumers, and the company’s consumers can become investors. With more consumers as shareholders, a consumer-facing corporation can strengthen its consumer base, because those shareholders feel invested in the corporation’s success and so will likely buy more products or services from it. In addition, long-term consumers could decide to invest in a corporation because they believe in the quality of the offered services and products and are familiar with the corporate brand. Furthermore, consumer-facing corporations could get ideas for products and services expansion from their investors, who are also customers—or ‘investomers’.
To a large extent, the positive effect of retail investors on corporations and society depends on whether they exercise their power over corporate governance. In other words, corporations and society fully harness the collective power of retail investors only if retail investors engage with the corporate sector and vote their shares. However, how to bring retail investors to vote and engage with corporations is an open question. Online engagement through, for example, the corporate forum, could play a substantial role. Any initiative to engage retail investors, however, must be rooted in widespread education on investing, which should be mandatory in at least high schools. Investing education should cover corporate governance and convey the power over corporations that citizens can exercise when they hold shares.
Sergio Alberto Gramitto Ricci is the Law and Business Entrepreneurship Jacobson Fellow at the New York University School of Law.
Christina M Sautter is the Cynthia Felder Fayard Professor of Law, the Byron R. Kantrow Professor of Law, and the Vinson & Elkins Professor of Law at Louisiana State University Paul M. Hebert Law Center.
This post was originally published on the Columbia Law School Blue Sky Blog and is based on Dr Gramitto Ricci and Prof Sautter’s forthcoming book chapter, 'Harnessing the Collective Power of Retail Investors' (to be published in A Research Agenda for Corporate Law (Christopher M Bruner & Marc Moore, eds.) (Edward Elgar Publishing), available here.
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