Most CEOs know their largest shareholders on a first-name basis. Investor Relations Directors speak to them most every day. This continuous involvement often gives management a false sense of familiarity with those who determine its stock price. It is a false familiarity because it masks their relative lack of information about how investors make decisions to buy and sell the company’s shares.
One reason for this disconnect lies in the nature of engagement between managers and investors. Investors approach their meetings with managers for the purpose of eliciting as much information as possible. And managers, who want nothing but to boost the share price, spend all the time available telling their story.
The story they tell is the one they, themselves, find most compelling. Unfortunately, the one-way nature of the conversation means that usable intelligence on how investors think is usually missing from managers’ toolkit. They never hear it. So, the story management tells has limited overlap with investors’ way of judging the company. The differences between the professional cultures of managers and investors are too great.
Managers generally achieve their positions because of an ability to see the broad contours of an industry and act on what they see. They are responsible to their boards for delivering an acceptable return on the company’s capital, and their enterprise is long term. Most investors, on the other hand, worry about quarterly earnings and margin growth on the belief that these measures forecast share price.
If we were to play out this scenario to the end of time, return on capital and share value would converge. But there is no escaping the fact that different time horizons mean different ways of measuring performance. For investors, the “Sell” button is often too close at hand to allow time for management to do its job. Investors’ preferred action is often to dump the stock rather than enlist in management's long view.
Because managers do most of the talking in the relationship between companies and investors, most of the feedback they receive on their performance comes through the stock price. It tells them whether investors admire them – or don’t. But it doesn’t tell them why. So, it reveals little in the way of information about what they can do about it.
In my book, “CRISIS OF CHARACTER,” I describe this dynamic as a “Value Paradox.” Management goes to work every day with a certain idea of how to create value out of the company’s assets. But investors, operating far away and with different opinions on how to create value, determine the stock price. And, in setting value for the shares, they often exert a powerful effect on the personal wealth of managers.
The good news is that managers can resolve this paradox. Investors’ thought processes are knowable. And, in being knowable, they are addressable. But to learn how investors really think about a company, management must undertake one singularly unconventional act:
It must ask them what they think.
It can ask by mandating perception studies. Or it can invite investors in to offer perspective. In doing either of these, management may see that asking is a communication in itself. Showing an interest in investor opinion can – as a distinct act – enhance market confidence in the company in addition to showing managers how they can communicate and operate for better value.