Roche

Nov 28, 2023

Investor relations strategy should prioritize long-term investors who are the true owners of your company. Communicating with investors is a delicate task requiring transparency, consistency, and a simple story. But the messaging shouldn’t target all investors equally. In this episode of the Inside the Strategy Room podcast, four experts discuss how to maximize the impact of investor relations. Jay Gelb and Werner Rehm co-lead McKinsey’s work in investor relations and communications; David Honigmann is an expert in organizational and interpersonal communications; and Karl Mahler is the former of head of investor relations at Hoffmann-La Roche. This is an edited transcript of their conversation. For more discussions on the strategy issues that matter, follow the series on your preferred podcast platform . Sean Brown: What are the key principles that should guide how companies approach investor relations? Werner Rehm: First, the goal of investor relations should be to align the share price with the intrinsic value of the company. It’s not helpful to be below that value, obviously, but it’s also not helpful to be above it, because at some point the share price will come down to what the company should be worth and that can happen quickly. Digital and AI transformations are everywhere. Almost every company has done, is doing, or plans to do one. But how can you make the changes stick? In this episode of the Inside the Strategy Room podcast, McKinsey senior partner Eric Lamarre talks about the critical elements of what it takes to rewire an organization through making fundamental changes to talent, operating model, and technology and data capabilities. He is coauthor with Kate Smaje and Rodney Zemmel of the Wall Street Journal bestseller Rewired: The McKinsey guide to outcompeting in the age of digital and AI. This is an edited transcript of their conversation. For more discussions on the strategy issues that matter, follow the series on your preferred podcast platform. It’s also important to think about which investors to talk to, because you won’t please them all. You will have long-term investors and momentum players, and focusing on intrinsic investors that invest in the long-term strategy matters most. These are the owners of the company, and they deserve not only an honest assessment of financial and operating performance but to be apprised of any bad news. We also think that content should dominate style. Some companies make a show out of investor day rather than treating it as an educational session about how and why the company makes money. Investor communications should highlight a deep understanding of the competitive dynamics, product markets, and long-term developments such as how ESG influences your customers’ behavior. Lastly, what’s internal is also external and vice versa, so consistency is important. Sean Brown: You mentioned intrinsic investors. How do you define them? Jay Gelb: There are different types of institutional investors, ranging from index funds to traders to what we call intrinsic investors. These investors undertake rigorous due diligence on companies’ ability to create long-term value and tend to build their portfolios from scratch, without taking cues on weighting from benchmarks. They also care deeply about the company’s underlying performance rather than quarterly results and the noise in the marketplace. Oftentimes, they view share price pullbacks as opportunities to increase their positions. This group is also unlikely to trade in and out of your stock. Intrinsic investors are your company’s support base over the long term, and the leadership team should be more open to meeting with them than other investors. Intrinsic investors care deeply about the company’s underlying performance rather than quarterly results and the noise in the marketplace. Jay Gelb Sean Brown: How do you identify those intrinsic investors? Werner Rehm: The concept of active share of a fund can be helpful. It’s a mathematical measure of distance from index funds. You can segment investors by who holds your stock for the longest term on average, who has a high active share on average, and so on. Karl Mahler: In a large company like Roche, our investors were investing $6 to $9 billion. They cannot go into and out of a stock because they would move too much volume. What we did is checked regularly to see who the top ten or 15 shareholders were and kept in regular contact with them. These were our intrinsic investors. Sean Brown: You recently conducted a survey of intrinsic investors. What did the results tell you about how they make their investment decisions? Jay Gelb: Intrinsic investors are focused mostly on company specifics rather than on industry conditions. For example, they look at your company’s sustainable competitive advantages, your margin profile, and whether the company is an efficient allocator of capital. These investors want to understand your strategy and they focus on long-term value creation rather than short-term trends (exhibit). These long-term-focused investors also want companies to take risks that will generate attractive returns and they care about management delivering on its objectives. We found that only a small percentage of intrinsic investors seek companies with low earnings volatility or a track record of exceeding consensus estimates, because those elements don’t necessarily enhance shareholder value. There are plenty of companies that have volatile earnings but a phenomenal track record of generating value over time, which is what’s ultimately reflected in a company’s valuation. Sean Brown: What’s the best way for companies to engage with these investors? Jay Gelb: You need to treat them as sophisticated thought partners. These investors often have good insights based on what they learned from other successful companies that can be applied to your situations. It’s important to be specific, to maintain transparency, and to establish and then maintain your credibility with them. Those are critical points. You should be open about both your successes and your failures. In addition, you should demonstrate to them a deep knowledge of the company and the industry and be clear that you won’t invest in projects or M&A opportunities with low payoff potential. Karl Mahler: In the end, it’s all about management credibility and capability. The management has to convince the investor market that they are doing the right things. That credibility is as important as your products, because investors want to know that you will use their money in the best way. They want the company’s leaders to be authentic, transparent, and clear about their shortcomings. Sometimes, you simply don’t know what the future will bring and pretending you do is the worst thing you can do. Management should say, “This is what I know, this is what I don’t know, and I will try to manage in the best way I can.” In the end, it’s about management credibility and capability. Investors want the company’s leaders to be authentic, transparent, and clear about their shortcomings. Karl Mahler David Honigmann: This applies not only when management is talking to investors but when they are talking to employees or the press. Part of authenticity is being consistent across all the communication channels and audiences. Sean Brown: Karl, during your time at Hoffmann-La Roche, how did you manage all the information—and misinformation—out there and keep the messages to your investors consistent? Karl Mahler: In my experience, you have super-knowledgeable investors on one side who can go deep and know everything about your products. These are specialists who often work for large funds. Then there are generalists who maybe in the morning invest in a healthcare company and in the afternoon in a consumer goods business. You have to find a way to make your story appeal to both the specialists and the generalists, because you want both to invest in your company. The best way to do that is to keep the messaging simple and crisp. As soon as the slides start to get full, with one message after another, people get lost. You can stay consistent only if you have a clear and easy-to-understand story. The biggest mistake I see companies make is trying to put out too many messages that are too complicated. Sean Brown: Sometimes, a bad quarter could lead to a stock selloff and maybe change intrinsic investors’ value thesis. How should management teams handle that? Werner Rehm: Every company will occasionally miss its numbers, but it matters why. If you miss because of a one-time tax settlement or another reason that can be easily explained, it doesn’t make much difference in the long term. If you miss because you have a fundamental problem that is likely to continue, that will matter. Sometimes, the share price does not go down because of earnings per share (EPS) but because, for example, M&A news was poorly received. It’s important to understand whether the missed numbers send a long-term signal. Jay Gelb: You want to avoid being on the quarterly guidance treadmill. That’s challenging for companies, particularly when they don’t meet their numbers and the market reacts. Instead, management should communicate long-term, aspirational targets. I don’t mean EPS guidance or even a range for next year but key performance indicators for top-line or sales growth, margins, customer growth, return on invested capital or equity, or expectations of capital deployment and whether you will reinvest that capital in the business to support growth, in M&A, or return it to shareholders. Remember that a selloff becomes a buying opportunity for intrinsically oriented investors. As long as the company keeps marching toward its long-term aspirations, long-term investors will remain, despite some interim noise from trading-oriented investors. Karl Mahler: I think that’s a super-important point. You should focus on the medium-term or long-term outlook. As long as you can convince investors that you are still on the right track, a quarter is not an issue. If, however, earlier messaging pointed in the wrong direction or executives are regularly overpromising, that starts to hurt because investors are no longer sure what the next quarter will bring. But as long as you can convince investors that your long-term path is intact, the short-term blips are just that. Every company has them. Werner Rehm: It comes back to the first thing that we discussed, which is the role of investor relations in aligning market value with intrinsic value. If you try to maximize the share price by inflating that value, it will come back to you likely in the form of a missed quarter, because at some point you will miss your revenue or top-line estimate. Subscribe to the Inside the Strategy Room podcast