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The Secret to High ROI Perception Studies

Boards of directors want to better understand investors’ sentiment around their companies’ stock, and as a result, are becoming more engaged with management teams’ investor relations strategies.  With the rise in more transformative long-term strategies such as M&A and divestitures, greater scrutiny of corporate governance, and the desire to engage with a shrinking active investor base, it’s now more important than ever to analyze and communicate investment narrative perceptions to the board to adequately prepare for potential vulnerabilities that may exist.  Thoughtful engagement requires a clear understanding of what drives active investors’ interest in the stock, how the story resonates, and what outstanding issues cause concern.

In gathering this intelligence, Boards often mistakenly rely on perception studies that benchmark solely against industry or index peers.  For example, market surveyors will ask investors to rank management teams and their strategies on a scale of 1 to 5 and then compare these results to an industry peer set, as well as fundamentally unrelated companies that share an index.   By depending on this approach, Boards are limiting their much-needed intelligence to a very small peer set – and more importantly – not the peer set active “stock picking” portfolio managers actually use.  A small-cap automotive stock, for instance, is more likely to compete for investment dollars with a small-cap business services company rather than Ford Motor Company.

When benchmarked against industry peers, the strongest performing stocks are usually considered to have the best practices.  But benchmarking simply doesn’t reflect the way the real world works.  Active managers invest around themes such as macro-economic, disruptive technologies, or infrastructure to name a few, or around specific performance metrics, such as double-digit growth rates, high R&D investment, growing gross margins.  When stocks perform well under one of these themes, it can lead to an inflated sense of confidence.  But when the market turns because of a poor performance, bad strategies or unforeseen circumstances, these companies are generally demoted to last place.

The secret to high ROI perception studies is three-fold: 

  • Investors queried must be represented by four distinct groups
  • Questions must illuminate key issues
  • Recommendations must be actionable and improve investor communication

To drive better value from perception work, Boards should recommend topic-based perception studies that hit four groups – current investors who have maxed out their positions, current investors who could buy more but have chosen not to so far, potential investors who have met with management many times but have yet to pull the trigger, and recent sellers.  Questions should be centered on areas of opportunity or concern, as well as the understanding of the go-forward strategy to better inform the board and management on key issues.  Finally, it’s critical that actionable recommendations are provided to help improve clarity, messaging and transparency, which should, in turn, build a stronger investment thesis that resonates with investors.  

Consider these four big questions to increase actionable recommendations:

  1. Does my company’s stock have a compelling equity story versus other stocks investors are considering buying? 
  2. Is there a consistent short thesis on my company?  
  3. Is management in touch with investors?
  4. Has the company provided sufficient quantitative and qualitative guidance to build a longer-term earnings and valuation model?  

A well-designed perception study should give boards and their management teams important findings for serious consideration. The results should not lead with comments such as, “This is what we expected,” or “This is what we already know.”  Instead, the results should feature actionable recommendations that improve investor communication by bridging gaps in understanding, providing a roadmap for growing shareholder value, and factoring in nuances to build a stronger story that fully resonates with investors.  Any issues raised that are strategic in nature will be the Board’s job to consider.  Other insights could be communications-related or tactical, and may range from guidance to strategic benchmarks to investor outreach or other actions – all of which the management team can decide whether to address.

Investing in real conversations with active investors, rather than simply benchmarking, can deliver a high ROI by providing a company’s board and its management team the foundation to build greater investor confidence in the company and its growth strategy. Particularly at a time when so much is changing in the investment world, a company should keep its pulse on its current shareholder base and ensure that its investment story resonates with potential investors as the company evolves.

 

To read more of our thought leadership on related topics, follow these links:

Proactively Attract Investors in an Increasingly Passive World– published by Clermont Partners and the National Investor Relations Institute (NIRI), and New Mandates for CEO Communications.