Shareholder Engagement in Search Funds: Why It Matters

Introduction

The search fund model – where entrepreneurs raise capital to search for, acquire, and lead a small company – has expanded rapidly around the world in recent years. A niche experiment in the 1980s is now a global phenomenon experiencing exponential growth. This growth has been especially pronounced since around 2013, an inflection point after which the number of new search funds launched each year shot upward. Alongside this boom, the asset class is undergoing institutionalization: more professional investors and even investment funds are backing search fund entrepreneurs, bringing greater resources – and new dynamics – to the community.

For aspiring search fund founders, this landscape presents exciting opportunities – but also new challenges. In a community that was once small and close-knit, how do you maintain the same alignment, trust, and shared knowledge as the network scales up? One emerging answer is to actively practice shareholder engagement. A new IESE Business School study (March 2025) argues that shareholder engagement (SE) can be a vital tool to uphold the collaborative culture and strong performance of search funds as they evolve. In this article, we’ll explore what shareholder engagement means, why it matters for the success of search funds, and how you can implement it in practice – blending both practical tips and insights from academic research.

What is Shareholder Engagement?

Simply put, shareholder engagement refers to communication between a company’s shareholders (owners/investors) and its leadership, especially the board of directors, aimed at influencing and improving the business. Unlike routine investor relations (which often consist of one-way updates from management to investors), true shareholder engagement is a conversation. It involves shareholders voicing their perspectives or concerns to the board, and the board (or sometimes management) actively listening and responding.

Different organizations define SE slightly differently. For example, one definition emphasizes investors using their voice to push companies toward better practices – such as improved sustainability or governance. Another describes SE as company-initiated efforts to discuss a wide range of topics (strategy, executive pay, risk management, etc.) with shareholders beyond the usual quarterly reports and annual meetings. A broader definition, which the IESE study adopts, covers “all the ways that shareholders can communicate their views to the board and that boards can communicate their perspectives to shareholders,” over and above normal investor relations routines. The decisive characteristic here is that it’s a two-way engagement between owners and the board. In other words, shareholder engagement is a dialogue – not just management presenting slides while investors quietly li​sten. But rather an exchange where shareholders also have a chance to be heard, ask questions, and offer input. This two-way nature is important. It means that as a search fund entrepreneur, engaging your shareholders isn’t merely sending out updates – it’s also soliciting their feedback and involving them (appropriately) in key discussions. Done right, SE can harness the collective expertise of your investors while building mutual understanding and trust. To appreciate why that matters, it helps to look at how shareholder engagement came to prominence in larger companies, and why it’s now becoming relevant even for private ventures like search funds.

From Public Markets to Search Funds: A Brief History

Shareholder engagement has historically been a concern mainly for public companies. Once upon a time (think 17th-century joint-stock companies chartered for voyages), owners of enterprises became numerous and distant from the managers running the business. This separation of ownership and control brought great benefits – it let many people invest in ventures without directly managing them – but it also introduced what economists later called the principal–agent problem. In essence, managers might not always act in the best interest of the dispersed shareholders. As early as 1776, Adam Smith warned that hired managers of “other people’s money” may not exhibit the same vigilance as an owner would.

In the United States, throughout the 19th and early 20th centuries, many businesses were actually owner-managed (think of Carnegie or Rockefeller, who were both majority owners and bosses). But as companies grew and professional managers took over, the potential for misalignment grew more evident. By 1976, academics Michael Jensen and William Meckling famously conceptualized the issue in their paper on agency theory – essentially laying out why managers (agents) might pursue their own interests over shareholders’ interests, and how corporate governance mechanisms like boards of directors are meant to mitigate that.

However, having a board elected by shareholders was not a cure-all. In fact, for much of the 20th century, shareholder influence in big corporations was quite limited. Corporate law and practice made it hard for dispersed shareholders to organize or oust directors, and most voted with management’s recommendations by default. Legal scholar Lucian Bebchuk pointed out in 2007 that the theoretical power of shareholders to replace a company’s board was “largely a myth”, given how boards could be self-perpetuating and shareholders often had no real alternative candidates. In practice, unless an activist investor mounted an expensive proxy fight, the average shareholder had little voice.

This began to change in the 2000s, especially after major corporate scandals (like Enron) and the 2008 financial crisis. There was a wave of reforms and initiatives to strengthen shareholder rights and engagement. For instance, regulations like the Sarbanes-Oxley Act (2002) and Dodd-Frank (2010) in the U.S. addressed board accountability and gave shareholders say-on-pay votes. In the UK and other countries, new stewardship codes were introduced around 2010 to encourage institutional investors to actively monitor and engage with companies. Perhaps most relevant, in 2013 a group of leading board directors and investors created the Shareholder-Director Exchange (SDX) Protocol, a set of 10 guidelines for when and how boards should engage directly with shareholders. This was a clear signal that constructive dialogue (not just reactive activism) was becoming a recognized part of good governance.

Academic and financial research started to validate that more engagement can lead to better outcomes. Studies have found, for example, that firms with active shareholder engagement see improved accounting performance and stock price returns, better corporate governance practices, and even lower risk (volatility) in the long run. One influential study by Dimson, Karakaş, and Li (2015) examined hundreds of engagement campaigns and noted that successful engagements (where the company responded to investor concerns) were followed by positive abnormal stock returns and improvements in operations. Similarly, research by Khan, Serafeim, and Yoon (2016) found that focusing on material sustainability issues – often a topic raised by engaged shareholders – correlates with higher shareholder value and financial performance. In short, there is evidence that when shareholders constructively voice their concerns (whether about governance, strategy, or ESG matters) and companies listen, it can pay off for everyone.

What about private companies? In closely held or private firms, formal shareholder engagement has been less of “a thing” historically. This is largely because many of these companies have a dominant owner or a small group of hands-on investors, so traditional principal–agent issues are muted. If you own 50% of a family business and run it day to day, there’s no need to “engage” with yourself; you already have full alignment. Even in venture-funded startups or PE-owned firms, the investors often sit on the board or have direct lines to management, making separate engagement forums unnecessary. In many private setups, the CEO might also be a major shareholder, aligning their interests with the owners by default. And if not, there’s usually at least one large lead investor who keeps a close watch.

Search funds were originally structured to hard-wire alignment from the get-go. The entrepreneur (searcher-turned-CEO) typically owns a significant equity stake, sometimes the single largest stake, after acquiring the company. Investors intentionally put the CEO “in the same boat” as themselves as shareholders. Moreover, search fund investors often take board seats or actively advise the CEO. The core search fund model has a strong culture of collaboration and mentorship – early pioneers like H. Irving Grousbeck and others fostered a norm that investors would be coaches (hence the famous metaphor of the jockey (CEO), horse (acquired business), and coach (investors)). With high trust and frequent informal communication, traditional corporate governance problems were rare in this world. If a serious issue did arise (say a CEO not performing), the board of experienced investors would address it swiftly – in some cases even replacing the CEO – to protect the company. This tight-knit, high-alignment environment meant there hasn’t been an obvious need for additional “shareholder engagement” mechanisms in search funds in the past.

So, why talk about shareholder engagement for search funds now? The short answer: the context is changing. As we saw, the community is getting bigger and more diverse. Relationships that used to be built on personal connections are becoming more arm’s-length as new investors join in. The IESE study notes that the field’s growth, while positive, risks diluting the shared culture and collective learning that made search funds so special. In a small community, an investor might co-invest in many deals and personally know most other players, ensuring everyone “gets” the model’s values. Now, with many more searchers and investors, not everyone knows each other, and not everyone operates with the same unwritten rules. There’s greater chance of misunderstandings or misalignment if things aren’t communicated well. In fact, as syndicates (investor groups) become larger and include institutional funds, some search fund cap tables start to resemble a miniature public shareholder base – no single investor owns more than, say, 10–15%. That’s great for spreading risk, but it also means no one investor automatically calls the shots or stays deeply involved, and the old informal governance might not suffice to keep everyone aligned.

Why Shareholder Engagement Matters for Search Funds

1. Preserving the Culture and Knowledge Sharing: Perhaps the biggest benefit of shareholder engagement in the search fund context is maintaining the unique culture that has driven the model’s success. The traditional search fund culture is one of openness, shared learning, and “paying it forward” – experienced investors mentor new searchers, and lessons learned are circulated within the community. As the IESE note highlights, this culture was easier to preserve when the community was smaller and more interconnected through repeat interactions. Now, with rapid growth, there’s a risk that both culture and performance could dilute if new participants don’t absorb the same values. Proactive engagement is a way to socialize investors (and even new board members) into the search fund ethos. By actively communicating, investors and CEOs can ensure that things like long-term orientation, integrity with sellers, and a collaborative spirit continue to permeate every deal and company, rather than getting lost in the shuffle of growth. In practical terms, this might mean holding community events or webinars where search fund CEOs and investors discuss challenges and best practices (thus spreading knowledge). It also means within each deal, the lead investors should engage the broader syndicate, keeping them informed and soliciting input, so that even those who are not on the board feel connected to the mission. Engaged shareholders are aware of the company’s context and strategy, and thus more likely to uphold its values. This two-way street fuels what researchers call a “community of practice,” where everyone learns and improves together – a critical advantage for first-time CEOs looking to avoid pitfalls.

2. Mitigating Agency and Alignment Risks: While classic principal–agent agency problems were largely mitigated in search funds by equity incentives and close oversight, the evolving landscape introduces new kinds of agency risks. One is what scholars term principal–principal agency conflict. This occurs when different shareholders (principals) have diverging interests – for example, an institutional investor might prioritize a quicker exit, while the entrepreneur and some individuals prefer steady long-term growth. Or perhaps one investor is particularly concerned about preserving the company’s mission, while another cares mostly about financial metrics. Without engagement, such differences might remain hidden until they erupt at a critical juncture (say, whether to sell the company). Regular shareholder engagement provides a forum to surface and reconcile these viewpoints early. By having frank discussions about goals and concerns, the board and investors can reach a shared understanding, or at least be aware of any disagreements and manage them constructively. In other words, engagement acts as a pressure release valve – reducing the chance of nasty surprises or silent resentments. It also lessens information asymmetry: investors outside the board get deeper insight into what management is doing and why, which reduces misgivings. The IESE study notes that overall, evidence shows SE helps align owners and managers by mitigating the information gaps and incentive conflicts that otherwise might lead to problems. In a search fund, this could be as simple as the CEO sending a brief monthly update and inviting questions, or as involved as convening all shareholders for a strategic review session annually. When shareholders feel heard and informed, they are far more likely to remain supportive (and to step up with help when needed) rather than becoming adversaries.

Furthermore, engaged shareholders can act as an early warning system. If an investor has concerns – say, noticing the company drifting from its core values or the CEO making decisions that deviate from the agreed strategy – a culture of engagement encourages them to voice it constructively to the board or CEO, rather than staying silent or, worse, pulling support behind the scenes. For the CEO, this may sound a bit uncomfortable (who likes more people scrutinizing them?), but for a first-time CEO especially, it’s actually a blessing. It’s much better to have a candid conversation with investors about, for example, why your sales strategy changed, than to have grumbling in the background or sudden investor attrition. Engagement builds trust, so even if mistakes happen, shareholders are more likely to give management the benefit of the doubt and help course-correct, rather than assume the worst.

3. Strengthening Governance and Board Effectiveness: The board of directors is the primary formal link between shareholders and management in any company. In search funds, boards are often small (maybe 3–5 people) and composed of key investors and independent directors. A strong, functional board is one of the biggest predictors of success post-acquisition. Shareholder engagement can bolster the board’s effectiveness in a few ways. First, it can increase the quality of board oversight by ensuring the board hears a wider set of owner perspectives. For instance, if a few non-board investors raise a valid concern to the board, that input can be taken into account in board deliberations. Second, engagement helps boards communicate back to all shareholders, which boosts transparency and trust. Rather than a mysterious black box, the board becomes a group that investors know is listening and acting in their interest. The IESE research notes that companies with active shareholder engagement often see higher valuations and returns for investors, partly because good engagement signals strong governance and accountability. In a search fund context, imagine you have a dozen investors who aren’t on the board. If you never engage them, they might worry if the board is doing a good job or if the CEO is following the plan. But if the board periodically engages with them – say, sharing how they are overseeing strategy and inviting input on big decisions – it builds confidence across the shareholder base. This can be crucial if the company hits a rough patch and needs continued investor support. Additionally, by tapping into the expertise of the broader investor group, the board can become aware of resources or contacts that an “unengaged” board might miss. (For example, perhaps one of the minor investors has deep HR experience – if the CEO mentions in an engagement forum that they need help with building a sales team, that investor could volunteer to assist, thereby strengthening the company’s human capital.) In summary, an engaged shareholder base can augment the board’s capacity to guide the company.

4. Protecting the Company’s Long-Term Health: Search funds often operate in a delicate phase – acquiring a stable small business and then trying to grow it under new leadership. The transition of a company after acquisition can be tricky; it involves winning over employees, implementing new ideas, and sometimes weathering unexpected hurdles in the first year or two. In such times, active shareholder engagement can be a stabilizer. It helps preserve continuity and confidence. Investors who are kept in the loop and engaged are less likely to panic if growth is slower than expected in year one, because they understand the context and challenges the CEO is facing. They can also help reinforce the core purpose and values of the company, ensuring the new CEO doesn’t inadvertently derail what made the business good in the first place. On the flip side, if the CEO has ambitious plans (new product lines, expansions, etc.), having engaged shareholders means she can gauge their appetite and get buy-in early, rather than risking a rift by charging ahead alone. Essentially, engagement aligns expectations on all sides for the long term.

It’s worth noting that many benefits of shareholder engagement observed in public firms likely translate to private companies too. Studies have found that active engagement is associated with lower stock volatility and even lower probability of bankruptcy, as companies become more resilient to shocks. While a search fund company isn’t publicly traded, the analogy is that engaged owners will catch and help fix problems before they threaten the business’s survival (e.g. stepping in with advice or interim management if needed), thus increasing the company’s stability. Engaged shareholders also tend to spread good news about the company and defend it during bad times, which can indirectly boost the firm’s reputation and brand. For example, if your investors are proud and knowledgeable owners, they might refer great talent or new customers to your business – an extra bonus of keeping them engaged and enthusiastic.

To illustrate, consider a hypothetical case: Founder Alice acquires a 30-year-old family manufacturing business via a search fund. She has 15 investors. In the first six months, sales dip as a major client leaves. If Alice goes quiet out of embarrassment, some investors might assume the worst or question her leadership. However, Alice instead schedules a special update call with all shareholders. She candidly explains the situation, what the team is doing to win new clients, and asks for any ideas or contacts that might help. Several investors chime in with suggestions – one introduces a potential customer lead, another offers to review the sales strategy. A few months later, the company lands two new clients and revenue stabilizes. Alice keeps everyone posted. By engaging her shareholders in the problem-solving process, she not only benefited from their ideas but also strengthened their confidence in her as a capable, transparent CEO. In the end, the crisis was a bonding experience rather than a blow-up. This is the power of shareholder engagement: it turns your investors into active allies in your success.

Implementing Shareholder Engagement in a Search Fund

So, how can you practically implement shareholder engagement in your search fund venture? It’s one thing to recognize its importance in theory, but what does it look like day-to-day or year-to-year for a small company with, say, a dozen investors? Below are some practical strategies and best practices – a mix of advice distilled from the IESE study’s “guiding principles” and general lessons from the field:

1. Clarify Boundaries: Board vs. Management Roles – The first rule of engagement is knowing what to engage on (and what not to). Remember that shareholder engagement should focus on board-level matters, not day-to-day management issues. You, as CEO, still need the freedom to run the company’s operations without a committee of investors second-guessing every move. SE is in addition to, not a replacement for, regular management communication to shareholders. A useful guideline: if it’s about execution, it’s a management topic (for management to handle via normal reporting). If it’s a major decision that affects long-term shareholder value (strategy changes, significant investments, leadership hires/fires, etc.), it merits board involvement – and those are the kinds of topics suited for shareholder engagement dialogue. To put it simply, the board and shareholders shouldn’t micromanage, especially with an inexperienced CEO, as that can undermine management authority. Make it clear early on (perhaps at your first meeting post-acquisition) that operational updates will come from management regularly, but certain big-picture topics will be opened for shareholder discussion. By respecting these boundaries, you ensure engagement is productive and doesn’t devolve into investors confusing their role with the CEO’s.

2. Enable Two-Way Communication – True engagement requires bidirectional flow: from the board to shareholders and from shareholders to the board. In practice, this means structuring communications that invite input. For example, instead of just emailing quarterly financials (one-way), consider including a few thought questions: “Do any of you see risks we might be overlooking?” or “We’d love investor perspective on XYZ initiative at the annual meeting.” Also, ensure there are channels for investors to reach out with ideas or concerns – whether that’s a scheduled Q&A slot in meetings or an open-door policy for calls on certain days. The mindset to cultivate is that shareholders’ perspectives are valuable and worth listening to. Even though not every shareholder comment will translate into action, the act of hearing them out can yield insights and makes investors feel vested. Some companies set up an advisory council of minority investors who meet with the board once a year to provide feedback – that’s one way to formalize two-way engagement. For a search fund, something less formal can work too: perhaps an open roundtable discussion with all shareholders when forming the annual plan. The key is that information and opinions flow both directions, not just top-down.

3. Set a Regular Engagement Cadence and Format – Don’t leave engagement to ad-hoc chance. It helps to schedule structured interactions with shareholders beyond the routine board meetings. A good practice noted in the IESE study is to hold semi-annual shareholder forums in addition to quarterly board meetings. For instance, every six months have a meeting (virtual or in-person) where the full investor group is invited to hear from the board and discuss strategic topics. In some cases, you might want more frequent touchpoints – e.g. if you have a large group of investors or during volatile periods, quarterly engagement calls could be warranted. During these sessions, it’s often wise to include an “in camera” segment – meaning a portion where the CEO and management team step out, so that shareholders can candidly discuss amongst themselves or with board members. This is not to exclude you as CEO out of secrecy; rather, it allows shareholders to raise concerns freely and the board to aggregate feedback constructively (they can relay anything critical to you afterwards). It’s similar to how boards meet alone in executive session. You might also occasionally have an in-camera excluding a particular conflicted party (e.g. if one investor was also the seller of the business and remains a shareholder, the others might talk independently about any related issues). Additionally, establish a clear engagement policy or charter early on. This doesn’t need to be overly formal, but everyone should know the when, how, and about what of engagement. For example: “We will have two all-investor meetings per year (one mid-year, one end-of-year). In those, the board will present on long-term strategy, risks, and performance, and investors are encouraged to ask questions and provide input. Outside of that, investors can email questions anytime and will receive monthly update reports.” Setting these expectations manages the flow of communication so it’s consistent and not chaotic. It also signals to investors that you take engagement seriously and are committing time to it.

4. Keep the Long Term and Leadership Development in Focus – Ensure that the content of engagements doesn’t get lost in minutiae or short-term noise. Steer discussions toward long-term value creation and the growth of the CEO as a leader. In a search fund, one of the most unique aspects is that investors are not just passive financiers but also mentors shaping a first-time CEO into an effective company leader. Use shareholder engagement as a platform for this mentorship. For instance, beyond talking numbers, discuss the company’s vision, culture, and talent development. Solicit advice on strategic dilemmas, not just approval for budgets. This shows investors that their role is to coach and contribute, not just to critique. It also reminds everyone that the ultimate goal is building a great company over the long haul, not just hitting the next quarter’s targets. Emphasizing the long term can be as simple as framing meeting agendas around strategic themes (market positioning, product innovation, team building) rather than only financial results. Highlight progress in developing the management team – e.g., “Our CFO just completed a training program recommended by one of our investors, which will help us scale.” When investors see that you welcome their involvement in shaping the company’s future (and yourself as a leader), they are more likely to engage enthusiastically. It creates a learning culture, where all parties (including the CEO) are continually learning and improving together – which is exactly the kind of community-based learning the search fund model thrived on historically. Don’t be afraid to admit what you as a CEO are still learning and how investors might help; this humility and openness can strengthen the bond and collective purpose.

5. Maintain a Professional, Constructive Tone – In all engagement interactions, set a tone of professionalism, collegiality, and respect. This applies to both sides – management and investors. The goal is to have candid discussions, but always in the spirit of collaboration. Encourage investors to be constructive in their feedback (focus on solutions or improvements, not just problems) and to respect boundaries – for example, avoid swarming the CEO with advice on minor issues outside of meetings. Likewise, as CEO, show that you value input even when you may disagree. If an investor’s idea isn’t feasible, thank them and explain your reasoning calmly rather than getting defensive. Setting this tone might involve creating some simple ground rules, like “challenge ideas, not people” or reminding everyone that we’re on the same team. Especially because a search fund often involves a young CEO and older, very experienced investors, it’s important to foster a collegial atmosphere where the CEO isn’t intimidated or the investors aren’t dismissed. All actors should take individual responsibility to be constructive contributors. If someone steps out of line (say, an investor starts berating an executive in a meeting), the board chair or lead investor should intervene and reinforce the norms. Over time, if you maintain a consistent culture of mutual respect and problem-solving, these engagements will be something everyone looks forward to rather than dreads. And don’t forget to keep it professional – circulate agendas, document key discussion points or decisions, and follow up on action items. Treat these engagement sessions with the same rigor as you would a key client meeting or formal board meeting. That signals that this is serious business, not just a casual chat. A well-run engagement process gives investors confidence that the company is in good hands and their time is well spent.

6. Adapt and Evolve as Needed – Finally, recognize that shareholder engagement is not one-size-fits-all, and it might evolve as your company grows. Be willing to review and adjust your engagement approach over time. Perhaps you start with informal quarterly calls, and you realize investors actually want more detailed semi-annual meetings – you can implement that. Or maybe as trust builds, you find you don’t need to meet as often, and an annual summit suffices. Stay flexible. What matters is the underlying principle of keeping communication lines open and owners involved in a healthy way. As you gain experience (and as your investors gain confidence in you), the dynamics of engagement will shift. In a successful scenario, your investor group over time becomes a well-oiled support system that knows how to give input without overstepping. At that point, engagements might feel very natural and even more infrequent check-ins might work because trust is high. In other cases, if new investors come on board or you face a major company turning point, you might temporarily ramp up engagement again. The point is to periodically ask, “Is our engagement approach still serving us well?”, and if not, tweak it. This reflective, improvement-oriented mindset (a learning culture) keeps the engagement process effective and relevant.

By implementing these strategies, a search fund entrepreneur can create a robust shareholder engagement program that scales with the company. It can start small – for example, a simple newsletter with a feedback request can be the seed – and grow into a more structured process as needed. The payoff is a more cohesive investor group and a stronger company. As the IESE study authors note, building effective boards has always been a critical milestone for search funds, and now as the field grows more institutional, it’s vital to guard the community’s culture and support system for future generations of searchers. Active engagement is a modern tool to do just that without undermining the entrepreneurial nature of the model.

Conclusion

The extraordinary performance and low failure rates seen in the search fund world so far are not just luck – they’re largely a result of the culture and alignment built into the model from its inception. Aspiring CEOs benefit from close mentorship, investors roll up their sleeves to help, and everyone wins when the company succeeds. As the search fund model scales globally and attracts new participants, there is a very real risk of dilution of that culture, and by extension, a potential decline in the model’s outcomes. However, this fate is not inevitable. By embracing shareholder engagement, the search fund community – and individual search fund companies – can deliberately stay true to the model’s roots even amid growth.

In practical terms, this means founders should view their investors not just as capital providers, but as valuable partners in dialogue. Engaging them through regular, two-way communication keeps everyone aligned on the mission and aware of their mutual responsibilities. It creates a feedback loop where problems are identified early, ideas are freely shared, and successes are collectively celebrated. In an engaged environment, investors are more likely to go the extra mile to support the company (with expertise, networks, or additional funds) because they feel invested beyond just their dollars. Likewise, entrepreneurs gain a broader perspective and a network of advisors who are intimately familiar with the business.

Ultimately, shareholder engagement is about building a community around your company, much like the broader search fund community, but at the micro level of your cap table. It’s about embedding your venture in a web of strong relationships that can withstand challenges. As the IESE study concludes, this practice can be a way for the search fund model to keep thriving in the long run. For the new search fund entrepreneur, it may seem like extra effort to manage – but the rewards in terms of guidance, risk mitigation, and shared vision can make it well worth it. By cultivating engaged shareholders, you are effectively adding more brainpower and vigilance to your enterprise, while ensuring that the original spirit of collaboration and trust continues to fuel your growth.

In a world where the only constant is change, one could say the search fund model’s greatest strength has been its community. Shareholder engagement is the strategy to strengthen that community bond within each deal. So, as you embark on your search fund journey, remember: your investors can be more than a source of money – if you engage them right, they become mentors, guardians of culture, and champions of your success. And that can make all the difference in turning a small acquired company into the next great growth story.