Playing To Win
Strategy & Your Investor Relations Organization
It’s Trickier Than You May Think
I have seen sufficient frequency of a problematic phenomenon concerning the Investor Relations function to write about it in this Playing to Win/ Practitioner Insights (PTW/PI) piece. It is called Strategy and Your Investor Relations Organization: It’s Trickier Than You May Think. And as always, you can find all the previous PTW/PI here.
The Phenomenon
I will provide three examples of the phenomenon, one ancient and two recent, to illustrate the challenge.
When AG Lafley was appointed CEO by the board of P&G in June 2000, P&G was reeling. Its stock price had dropped by half in the prior several months. The company had missed guidance badly in the previous two quarters — the second miss after guidance had already been revised downward. Top line was flat and the bottom line declining. Lafley was replacing the first CEO to have been fired in the company’s (then) 163-year history.
Investor Relations (IR) advised Lafley that he had to reassure investors in his first formal communication to them that top and bottom lines would turnaround quickly and, by implication, the stock price would rebound. Lafley responded that he couldn’t give investors that message because it wasn’t true. Seven of its ten top brands were in share decline and costs had gotten substantially out of control. There was no instant fix to either problem.
Instead, he wanted both the company and investors to face reality not believe in a fantasy.
The message he wanted to send was that rather than financials rebounding immediately, next quarter would be worse than the current quarter, and the following quarter would be worse still. During those quarters, he would be fixing the value equation, focusing on understanding consumers, and restoring P&G’s historical performance in innovation and branding — his strategy. Then the third quarter out would be up — and every quarter thereafter for his tenure as CEO.
IR was nothing short of apoplectic. They fervently believed that his proposed message would be an IR disaster. The stock would completely tank and Lafley would lose all credibility with investors. They tried to talk him out of what they saw as insanity.
Lafley did it anyway and the stock traded UP after his communication to the market. It turned out that investors wanted to hear the truth and a strategy to fix the problems imbedded in it. And in retrospect, it was wise for investors to drive the price up, not down. Lafley delivered everything he promised. The shareholders who stuck with P&G did fabulously. And his time as CEO was legendary.
This aversion by IR to bold strategy shift has reared its head on and off across various companies with which I have worked. But it really caught my attention again with two recent situations.
One featured a CEO who wanted to shift the strategic direction of his company even though the company was performing well. But market circumstances were shifting, and he believed that the previous strategy had run its course, and a shift was appropriate and necessary. However, the new strategy entailed changing a single variable in one of the guidance ranges that the company had historically provided.
IR balked at that change being part of the message, but the CEO insisted. So, IR they came back with a storyline that featured the company prominently apologizing for changing that one guidance range.
The CEO held firm — with my enthusiastic support — that the company should not be apologizing for shifting to a superior strategy that would be better for investors. But it took numerous drafts to get an unapologetic version.
However, the CEO still worried that regardless of what the written press releases and his investor deck said, IR staff might undermine it — knowingly or unknowingly — by being defensive and apologetic in their individual conversations with shareholders. He was right that it was a vulnerability that he couldn’t control.
More recently still, another CEO saw it as time to shift strategy from one that was tailored specifically for a needed turnaround to one designed for post-turnaround acceleration. The shift was both sensible and necessary. But the reaction of IR was to come back with an exceptionally long list of questions primarily focused on the challenges of assuaging every imaginable concern of every stakeholder about this dramatic shift in strategy — again a shift that would be good for all involved.
The tone of the questions made it clear that they preferred maintaining the existing strategy, in part because if there wasn’t any meaningful change to the strategy, no one would experience the concerns that they feared. Continuing the status quo would be easier from a communications standpoint. Of course, it would only be easier until such time as the existing strategy, which had outlived its purpose, started to go off the rails. But that was a future problem and a speculative one at that.
Implications for Strategy
As a CEO, it would be nice if you could count on your IR folks to help you convince investors that the strategy you think best is, in fact, the best. After all, that is their job. But my observation is that you can’t count on it. In my experience, IR often attempts to talk CEOs out of bold strategy, out of helping investors understand the realities of the situation at hand, and out of admitting that previous assumptions are no longer valid.
On this front, eternal vigilance is the proverbial price of freedom. CEOs must stand ready to put their foot down and fight for their bold choices — inside and outside. But when it comes to IR, it is tricky. IR has direct relationships with investors thanks to their job. They can send any message they want to send in individual investor meetings. By the time the CEO finds out what message they really conveyed, damage may already have been done. The structural incentive problem is that IR has the capability to undermine the CEO’s strategy with investors and then turn around and say: “See, I told you it wouldn’t fly with investors.”
However, it goes almost without saying that this is clearly not a universal phenomenon that applies to all IR leaders/departments. Of course, there are great strategic IR leaders who support CEO strategy shifts to the hilt. Many CEOs can go to battle with full confidence that IR will be there at their side.
However, my philosophy is that when I see enough of a phenomenon, I seek to understand it, not dismiss it as anomalous — and I have seen enough of this one.
Practitioner Insights
Real strategy is tricky. It requires choices for which the opposite is not stupid on its face. Those are much harder to make than operating imperative decisions for which the opposite is stupid on its face — i.e., every other sensible company makes the same choice. Nobody gets skittish about the latter choices. That is the hallmark of planning — making a list of sensible choices that lack any distinctiveness.
When IR is skittish about strategy choice and enthusiastic about following the competitive crowd, it becomes part of the system that helps planning win over strategy as I have discussed previously in this series and in my viral video.
When choices are truly strategic, the logic of choice really matters. For observers, that logic is often very hard to unravel at the very end of the process if that is the first time an individual is hearing it. That is why I argue that anyone who must enthusiastically make choices in their own domain that are consistent with your set of choices — not in conflict as in the situations above — has got to be brought along during the development of your choices, not just informed at the end.
In fairness to the function, IR is often not brought along through the strategy choice process. Often IR is asked to communicate a strategy conclusion to investors into which they find hard to put their heart because they don’t truly understand how the logic was built. In some of those cases, they fight it and other times, they quietly undermine it. They aren’t being nefarious. In all the above cases — and more — they ardently believed that they were protecting the CEO and company.
I highlight the Enabling Management Systems box in the graphic above because when a CEO is contemplating a major shift in strategy, figuring out a system for involving IR in strategy development earlier rather than later is an important enabler. Obviously, CEOs can’t involve everyone in everything they do. But if the strategy is going to necessitate a major rethink on the part of investors, IR engagement has got to be thoughtfully considered and built in, so they don’t fight its establishment or undermine it with investors.
