Effective investor relations can be the key to attracting and retaining long-term investors, and ultimately, maximizing shareholder value. But how can companies create an investor relations strategy that truly resonates with investors? The answer may lie in the unconventional strategies used by some of the most successful CEOs in history.
In his book, "The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success," author William N. Thorndike examines the management and leadership strategies of eight highly successful CEOs. These leaders, despite coming from different industries and backgrounds, share several common traits that have contributed to their success, including a focus on capital allocation, a long-term perspective, effective communication and transparency, and a willingness to make unconventional decisions.
These common traits are as close to being “a blueprint for success” as any. The book is also a popular read amongst investors and when the Street sees management implementing these strategies, valuations tend to rise. These same strategies are often implemented by the elite strategic IR consultants – that’s because those truly top-tier firms are run by former investors who understand these principles. The reason they do this is because it very frequently leads to these companies getting the valuations they deserve.
Let’s dig into some of the examples and how hiring the right strategic investor relations consultant who understands these, can put them to use at your company.
Capital Allocation: The Key to Long-Term Success
One of the most significant factors that contributed to the success of the CEOs profiled in The Outsiders was their focus on capital allocation. These CEOs were skilled at identifying which investments would generate the best return on investment for their companies, and they were not afraid to divest or cut costs when necessary.
For example, consider John Malone, the former CEO of TCI. When Malone took over as CEO, the company had more than 12,000 cable systems, many of which were underperforming. Malone quickly sold off the underperforming systems and used the proceeds to invest in more promising areas of the business. This strategy ultimately helped TCI become one of the largest cable companies in the world.
The high-end investor relations consultants are typically former investors, who’ve built hundreds (probably thousands) of models. The have analyzed the unit economics of products, businesses, and industries. They’ve hired experts, traveled to lands far and wide in search of the truth, and truly understand what makes a good business.
Because they have this investing experience, these elite firms help clients analyze their own businesses and convince them of the benefit of identifying underperforming assets. They empathize with them because these are hard decisions to make. And then they show them that the “truly great ones” make these unemotional decisions that drive shareholder value. Through their dialogue, IR consultants show their clients how investors are likely to view their decisions to divest underperforming assets and reinvest in more promising areas of the business, optimizing their capital allocation and driving long-term shareholder value.
The Benefits of a Long-Term Perspective
Another key factor in the success of the CEOs in The Outsiders was their long-term perspective. Rather than focusing on short-term gains or quarterly earnings reports, these CEOs were committed to building sustainable, enduring businesses that would deliver value to shareholders over the long term.
This approach allowed them to weather economic downturns and other challenges more effectively than companies that were more focused on short-term gains. In fact, companies that take a long-term approach to investor relations tend to outperform those that don't.
Because of my history as a corporate executive, I understand the challenges of balancing the need to hit short-term targets against the desire to make long-term investments in the business. I understand that these decisions are hard to make and that executives often have competing agendas (e.g. short-term stock price vs. long-term value creation).
But because of my history as an investor, I understand the emotional desire to constantly “push for more” and to “show the Street how great things are.”
I use these diverse experiences to bring a unique perspective to my clients that enables them to properly balance the needs of investors and the needs of a business. In fact, the needs are exactly the same…it’s just a matter of timeframe and perspective that differentiates them. More than anything, I help my clients see this perceived dichotomy and together, we work to communicate a long-term vision to investors, while setting near-term expectations that provide flexibility to operate the business. I’ve found that this engenders trust and confidence in their leadership and over time, establishes their companies as long-term players in their industries.
Communication and Transparency
Effective communication and transparency are also critical components of successful investor relations. The CEOs in The Outsiders were excellent communicators who prioritized transparency with investors. They were able to articulate their companies' strategies and plans in a way that was easy for investors to understand, which helped build trust and confidence in their leadership. Where relevant, they also gave investors the appropriate metrics with which they could judge the company’s success or failure against their goals.
For example, consider Warren Buffett, the CEO of Berkshire Hathaway. Buffett is known for his clear and candid communication style (shown in his annual letter which is widely read across the industry), which has helped build strong relationships with Berkshire Hathaway's investors over the years.
A really good IR consultant knows what investors like to hear because they were once investors themselves. They know how “clear communication” sounds and they reward companies that communicate this way with better valuations. These “expert communicators” guide their clients to be clear and candid in their communication by articulating their companies' strategies and plans in a way that is easy for investors to understand. This making their stories easy to be told, and retold, which broadens the potential investor base and ultimately leads to a rising valuation.
Top-tier IR consultants also work with their clients to assess the key performance indicators (KPIs) they’re giving to the Street. A properly valued stock has not only a strong story, but also KPIs that support the story. Oftentimes, IR consultants suggest new KPIs that give investors insight into how the business is performing “under the covers.”
Unconventional Decision-Making
Finally, the CEOs in The Outsiders were not afraid to make unconventional decisions and take calculated risks. They were willing to pursue strategies that others might have dismissed as too risky or unconventional, which helped them identify opportunities that others had missed and ultimately led to their companies' success.
For example, consider Katharine Graham, the former CEO of The Washington Post Company. Graham made the bold decision to publish the Pentagon Papers, despite the legal and financial risks involved. This decision ultimately paid off, as it helped establish The Washington Post as a leading voice in American journalism.
A good investor relations consultant helps their clients see how investors will reward them for identifying and pursuing unconventional strategies that may help them stand out from the competition. They show them how taking calculated risks will be looked at by investors, and together they frame up the pros and cons. By outlining these decisions – and the calculus that went into them – to investors on earnings calls and in other prepared remarks, investors begin to see these companies as titans in their industries. By pursuing strategies that others might dismiss as too risky or unconventional, investors ultimately reward them for identifying opportunities that others have missed and ultimately drive long-term shareholder value.
Incorporating 'The Outsiders' Principles into Modern-Day Investor Relations
So how can companies incorporate these principles into their investor relations strategy? Here are a few tips to get started:
1. Partner with an expert investor relations consultant who has extensive experience as an institutional shareholder. Bonus points if they also have relevant experience like running IR in-house for a public company as well.
2. Focus on capital allocation by analyzing your business and identifying underperforming assets and discuss this strategy periodically during the year with your investors.
3. Take a long-term approach to investor relations by communicating a long-term vision to investors and focusing on building a sustainable, enduring business. When you make long-term decisions that affect the short-term, explain your calculus to investors in clear language that demonstrates the ROI you see.
4. Communicate effectively and transparently by being clear and candid in your communication with investors. Realize that investors are distracted and so it’s ok to repeat your story over and over until the Street understands it.
5. Be willing to make unconventional decisions and take calculated risks to identify opportunities that others have missed. When you do so, explain your rationale, and how investors should measure your success.
Choose your IR consultant carefully
Effective investor relations can be the key to attracting and retaining long-term investors and maximizing shareholder value. By taking a page from the CEOs profiled in The Outsiders and focusing on capital allocation, taking a long-term perspective, communicating effectively and transparently, and being willing to make unconventional decisions, companies can build enduring businesses that will deliver value to shareholders for years to come.
If you’re considering outside help in incorporating these strategies into your IR program, choose your IR consultant carefully. By choosing a seasoned investor relations consultant with practical knowledge and experience as an investor, these experts can offer a unique perspective that can help companies create an investor relations strategy that truly resonates with investors. By adopting the unconventional strategies employed by the CEOs in "The Outsiders," companies can set themselves apart from the competition and achieve long-term success. If you're looking to optimize your capital allocation, take a long-term perspective, communicate effectively with investors, and make unconventional decisions that drive growth, consider partnering with an investor relations consultant who has real-world experience as an institutional shareholder. Together with you, they can help your company reach its full potential and maximize value for all stakeholders.
