Playing To Win

Strategy and Leadership #1

Neutralizing Your Equity Market

Roger Martin
8 min readMar 20, 2023


Source: Roger L. Martin

A reader sent me an interesting question about the connection between leadership and strategy. Shortly thereafter, it was followed by a gloomy conversation with a client that caused me to think I should write on the subject. It is a big topic, so I am going to do a series on various aspects of the tie between strategy and leadership. My 15th Year III Playing to Win Practitioner Insights (PTW/PI) piece will start the series with Strategy & Leadership #1: Neutralizing Your Equity Market. You can find the previous 125 PTW/PI here.

The Modern Public Company Context

Many companies are private, but in the modern economy, a huge proportion of private sector capital and employment is in companies traded on public equity exchanges. I hear plenty of complaining by public company executives about ‘the capital markets.’ But really, they are complaining specifically about the vagaries of their equity market — their public shareholders. I understand their angst. It is tricky.

And with most such things in business, this trickiness calls for strategy decisions. Leadership means having a strategy for your shareholders. Unfortunately, most leaders don’t have a sufficiently thoughtful one, even if they have one for the customers of their product/service — what I will refer to as their overall strategy. The vacuum of a thoughtful shareholder strategy exposes their overall strategy to debilitating challenges.

Leaders must recognize that the public equity markets represent a crazy game full of players who don’t want anyone to understand what is really going on.

For example, most ‘investors’ aren’t investors in any real sense of that word. Except for the small minority of closely held public companies, the dominant proportion of names (weighted by holdings) on the share register aren’t investors. They are fiduciaries who sit between investors and companies, prominently giants such as Black Rock, State Street, and Fidelity. They don’t experience the effects of losses or gains in their own wallets. That is felt by the actual shareholders. Their dominant imperative is not the prosperity of companies but rather plausible deniability. That is, if something bad happens, they need to have an excuse, and if something good happens, they don’t want it to raise expectations so much that their investment performance in the current period will make it difficult for their returns to show strong performance in the subsequent period relative to the current period. That risks embarrassment, and that is something the fiduciaries are loath to experience.

And the equity analysts who advise them have to be understood in the context of the Impossibility Theorem about which I have written before. That is, if they had any personal confidence that they are right more than 50% of the time, they would not be advising others on what to invest. They would be investing for themselves and getting rich. To function, they need their advisees to believe the opposite of what they know to be true — which is that they know they are as effective as someone making investment decisions based on flipping a coin. Consequently, they care most about being exposed, and the greatest threat of exposure is for a company that they cover to embarrass them by either underperforming or overperforming their prediction — both are terrible things.

The other people who advise investors are the proxy advisory firms — ISS and Glass Lewis — who share 97% of the market in the coziest of duopolies. Their only role is to lend legitimacy to a crazy game. Frankly, I am stunned that they manage to survive at all. All they do is make pronouncements for which they have little or data to support. From what I can tell, they just make stuff up. However, they help make investors appear prudent if they vote the way these vacuous organizations advise. Truly, if giant meteorites hit both firms and wiped them out, there would be zero negative impact on the functioning of the equity markets.

Net, the key actors in the equity markets are a) fiduciaries who want you to believe they are investors, b) equity analysts who want you to believe they know something useful, and c) proxy advisory firms who want you to believe they are intelligent. It is all one giant mirage. And to protect the mirage, they will punish any firm that embarrasses them by failing to be consistent and reliable.

And unfortunately, the mirage has contributed to the growth of a class of parasite — which I have likened elsewhere to lamprey eels — the activist hedge funds. While they are actual investors, sadly they exploit the frailties of the mirage-based system for their own benefit while leaving a trail of human and societal destruction in their wake. They represent a huge challenge for leaders attempting to pursue their chosen overall strategy.

The Leadership & Strategy Consequence

The consequence is that leaders need a strategy to neutralize their equity market — or they risk fiduciaries jerking them around and/or activist hedge funds sucking out their blood. A shareholder strategy has the traditional five boxes of any other kind of strategy.

Winning Aspiration

At a minimum, a leader should aspire to neutralize any negative impact of the equity market on the company’s capacity to carry out its chosen strategy. This is not a trivial aspiration. For most of the 20th century, America’s public equity markets were an advantage for its companies relative to foreign companies. But in the past quarter century, they have become a disadvantage, constraining rather than enabling companies to act strategically.

That notwithstanding, Jeff Bezos demonstrates that a leader can aspire to a shareholder strategy that provides an advantage over competition, which he accomplished for Amazon. He managed to convince the equity market for a decade that he didn’t have to make profits (or just razor thin ones), just grow. And as a result, he had access to growth capital at a lower cost than companies in his competitive set. So, a leader can pursue a higher aspiration. But at a minimum leaders must have and act on an aspiration to keep the public equity market from wrecking their overall strategy.

Where-to-Play (WTP)

The key is to recognize that this is a real strategic variable. Too many leaders of public companies treat their shareholder WTP passively: whatever and whoever shows up. That is strategy by default — and not a good one.

A leader needs to determine what shareholders the company needs for its overall strategy to work and to market to them — just like it markets its product or service to its customers. Paul Polman did it as CEO of Unilever. When he became CEO of Unilever in 2009, he announced that he wanted to ensure that the company focused more on the long-term, powered by strong brands, sustained commitment to R&D, and leadership in ESG. And he explicitly told shareholders who didn’t like the strategy to get out of the stock. At the same time, he spent a great deal of time courting sovereign wealth funds and family offices that found his long-term strategic focus appealing.

Success in dramatically reshaping his share register enabled him to successfully pursue his strategy. And it really mattered in 2017 when Brazilian PE fund 3G launched a hostile bid to takeover Unilever and merge it with the combination of its prior takeovers, Kraft Heinz. Their pitch to Unilever shareholders was that 3G would dramatically improve performance by chopping the things Polman saw as central to its strategy. The bid failed, the first such failure for 3G, because the shareholders attracted by Polman weren’t interested in 3G’s slash and burn approach.

The key is to match your equity market strategy to your overall strategy. If your strategy is to pump up your stock and get out before it falls, you need to court a different shareholder base than the base Polman courted.

How-to-Win (HTW)

The next task is to determine a way to win with the shareholder base that you have marketed to. If you are Jeff Bezos, you court dreamers and then you sell them dreams — and behind that, your real strategy needs to deliver the dreams that you sold.

But if the aspiration is simply to have the freedom to prosecute your strategy and you have been able tilt your shareholder base somewhat in your favor, you still must be careful with the rest of your shareholder base — and their fiduciary agents.

The general rule is to not seek to please the equity market. That is like an abused spouse attempting to please the abuser. All that the pleasing accomplishes is the raising of expectations, which ends up disappointing the abuser and motivating more abuse. It is identical with the equity market. If you do something to make it deleriously happy, it will increase expectations, and inevitably you will fall short and then you will be hammered — hard.

The best shareholder strategy HTW is modestly undervalued equity. If you let your equity become overvalued, the equity market will force you to do stupid things. New CEOs need to determine what they want to accomplish over the entire course of their tenure and then move slowly but steadily toward their goal.

I once interviewed the CEO of a big global company at a leadership conference for his company and during the conversation, I asked him about his leadership approach to the equity market in which his company’s stock was traded. And his response was that you need to treat it like kids with candy. If you have a whole handful of candy, it is disastrous to show it to the kids. If you do, they will badger you for the whole handful, then get on a sugar high and be impossible to deal with. Instead, you must hide them in your pocket and pull one out occasionally, and they will be appreciative and well-behaved. Simply brilliant!

The key is to demonstrate stability and consistency so that you don’t embarrass the fiduciaries or analysts and do a slow walk on the stupid things that ISS and Glass Lewis insist on. That will maximize the probability that they will leave you alone to pursue your strategy and make the activist hedge funds less likely to attach themselves to your organs.

Must-Have Capabilities (MHC) & Enabling Management Systems (EMS)

As with all strategy, shareholder strategy is a pipe dream unless it includes MHC and EMS that bring it alive. If your shareholder strategy involves selling a dream, you have to develop the capability to sell your dream and a management system that produces the statistics that put the dream in the best light. On this front, Bezos was brilliant. He had the capability to sell the equity markets on the idea that all that mattered was growth in number of Amazon Prime accounts, not profits, and his organization delivered those results and compelling numbers to disseminate.

If your shareholder strategy involves generating reliability and consistency in financials, you need capabilities and systems to deliver on that outcome. Though on this front, systems that produce artificial consistency, which I pointed out as a hallmark of the late Jack Welch at GE and Bill Gates at Microsoft, go too far!

Practitioner Insights

One key attribute of leadership in the modern company is having a strategy for your equity market that facilitates your strategy. It is really tricky. The modern equity markets are full of people trying to keep everyone from understanding what they really do and how ineffective they really are. A leader’s shareholder strategy must, at a minimum, carefully navigate them to maintain your freedom to pursue your overall strategy. If you are really aggressive, you can even pursue a strategy to make it an advantage — as did Jeff Bezos. But if you don’t think consciously about your shareholder strategy, it is likely to bite you in the ass.



Roger Martin

Professor Roger Martin is a writer, strategy advisor and in 2017 was named the #1 management thinker in world. He is also former Dean of the Rotman School.