Most companies invest considerable time and money in trying to please investors and telling them what they think they want to hear. But making long-term investment decisions is not like choosing someone on a dating app; investors don’t want to be wowed with a few snippets of appealing information.
Choosing which stocks will perform well for, say, a large pension fund are in fact more like making a decision about a long-term relationship. It’s much healthier to understand all relevant information about a prospective beau via direct and explicit communication.
And this is exactly how the most successful companies of the past few decades go about their investor communications. The firms that CEB christened “efficient growth” companies have sustained long-term revenue growth while simultaneously improving margins over the past 15 years, and there are three distinct ways they communicate differently to investors.
They are more transparent about what they decide not to invest in: Efficient growth companies don’t only communicate to investors what their capital deployments are and how they will contribute to strategic growth. They also explain to investors what investments they didn’t make and why. This is in stark contrast to their less successful peers (see chart 1).
Chart 1: Likelihood of updating investors on areas the company plans to avoid For major investments and markets; n=112 (55 efficient growth leaders, 57 control group companies) Source: CEB analysis
Valspar, a paint manufacturer and one of the handful of efficient growth firms, uses illustrations, like the side-by-side pie charts in the graphic below, to show investors the two segments of the $120 billion market – “Auto OEM” and “Protective and Marine” – that it’s deliberately not investing in.
In contrast, one of Valspar’s peers attempts to display market dominance by showcasing all their investments across the board. But this doesn’t outline a specific strategy and probably confuses more than clarifies.
They provide more frequent updates on strategic pivots: Efficient growth leaders are 70% more likely to update their description of company strategy in annual reports each year than their peers. These frequent updates signal to investors that a company is constantly considering its strategic position. They also help investors have confidence in the management team’s ability to grow and adapt its position to market disruptions.
With markets and macro-economic conditions constantly evolving, it’s critical to illustrate for investors how your strategy will continue to safeguard profits. Updating investors on this regularly can also alleviate some investor concerns before they become too damaging.
They provide detailed long-term growth projections: It’s no secret investors want to see long-term growth strategy. Last year, Larry Fink, head of BlackRock, the world’s largest asset management firm (with $4.6 trillion under management), denounced short-termism in the corporate world and made the case for clearly spelling out growth plans for investors. And, according to his 2017 letter, many firms did exactly that.
“We also believe that companies have an obligation to be open and transparent about their growth plans so that shareholders can evaluate them and companies’ progress in executing on those plans,” wrote Fink in 2016.
But even with this advice how “long” is long-term? The best companies are 74% more likely to report their growth projections over three- and-five year time horizons, instead of quarterly projections (see chart 2).
It’s helpful for investors to understand time horizons in years, not quarters. The management team at Cerner, another of the sixty efficient-growth companies, detail how near-term plans help them achieve growth projections for 2025.
Chart 2: Likelihood of reporting 3- and 5-year time horizons Frequency of reporting growth plans on three- to five-year horizons; n=112 (55 efficient growth leaders, 57 control group companies) Source: CEB analysis