Companies should think about both analytical and emotional ways of connecting with investors, say IROs. Tim Human gets to the heart of the matter
We are often taught that the best decisions are made when feelings are removed. Don’t let your emotions get the better of you, goes the saying. But scientific studies have shown that, in reality, emotion is a key part of all decision-making.
‘Emotions are a shortcut the brain uses to quickly distill lots of complex information into an actionable impression,’ says Richard Peterson, founder and CEO at MarketPsyche, a provider of financial sentiment data. ‘Unless we are calculating robots, emotions cannot be removed from decision-making. There are myriad assumptions, past experiences and mental frameworks that govern everything from what information we consider to how fast we pull the trigger.’
If emotion plays some role in all decision-making, we can assume it informs the way investors buy and sell shares. At least, that’s the case when the investor is human, rather than one of the growing army of algo funds.
This may influence how companies engage with the buy side. Some IR professionals view building an emotional relationship as a key part of strengthening the bond between issuer and shareholder. Others note that playing on an investor’s emotional response could run the risk of taking IR marketing too far.
Falling in love with the stock ‘You win over investors with a very rational story around forecasts and growth, and a financial model, but I believe you tend to keep them by building a relationship, which makes them become less rational,’ says Peregrine Riviere, director of IR at FTSE 100 advertising group WPP.
He gives a simple example: ‘They might have set an internal price target. But if you impress and they kind of fall in love with you, they may dismiss their price target because they just think you are a great company.’
Peregrine Riviere, WPP
On the flip side, emotions can also prevent an investor from buying shares. Ricardo Jiménez, a partner at Sigma Rocket and former director of IR at Ferrovial, gives the example of a fund manager who has bet on a particular idea and lost. ‘When this happens, it can be a bitter experience,’ he says. ‘The chances of that fund manager coming back to the stock are pretty slim, even if it becomes very cheap.’
Investor relations departments sometimes overlook the importance of appealing to the emotional side of investors, notes Riviere, who has long been interested in this topic. He gives a couple of potential reasons why that may be the case.
First, some IR departments may have a strong focus on the sell side, which encourages a more analytical approach as they spend a lot of time helping analysts build models. Second, some companies may be reluctant to open up their people to the investment community, preferring to keep a tight grip on who speaks externally.
For the most part, however, investors want a broader view than that, notes Riviere. ‘They want to understand the culture, the depth and quality of management and how people think at all levels of the organization,’ he says. ‘They want to understand what differentiates company A and company B in the same sector. That might be higher growth or better margins. But then the question becomes why do they have higher growth or better margins? That will probably come down to people, culture, things like that – so you need to find a way to demonstrate that.’
Stakeholder communications Going beyond the numbers and providing a broader portrait of the business is today more important than ever. The advent of stakeholder capitalism means the bottom line is no longer the only measure of success. Companies need to explain their purpose, culture and how ESG issues are embedded in strategy.
And the pressure goes the other way, too. Asset managers are being encouraged to develop stronger relationships with companies, given the growing expectations around investor stewardship. ‘Over the last few years, I’ve noticed we are moving from transactional arrangements to relationships [between companies and investors],’ says Sallie Pilot, director and chief insight and engagement officer at Black Sun, a corporate reporting agency. ‘Companies need to think about how they build trust through proactive engagement and communications. The result of this is a much more transparent dialogue and exchange of information.’
Richard Orr, managing director and founder at Gather London, a creative consultancy, says companies need to show they are effectively engaging with all key stakeholders if they want to build a strong brand with investors.
‘The investment case is moving on to a much broader story that resonates with a wide set of stakeholders,’ he says. ‘If I was going to invest in your business, I would want to know you’re listening to and doing the right thing for all of these stakeholder groups.’
Open access Peterson says activities like one-on-one meetings with senior management, site visits and new product demonstrations could certainly help companies build a stronger relationship with investors.
‘Marketers have long known the power of reciprocity and building personal relationships – for example, familiarity bias – in biasing investor decision-making in their favor,’ he says.
Underlining the effect personal interactions can have on investor choices, some members of the buy side actively avoid meeting with management to try to keep subconscious bias from creeping into their work.
For example, Jeremy Lang, chief investment officer at London-based Ardevora Asset Management, does not include corporate access as part of his firm’s investment process, according to a 2019 interview with Wealth Manager. ‘Instead of meeting with management, we prefer to keep a safe distance, judging management instead by observable facts,’ he said. Ardevora could not be reached for comment.
But the vast majority of active investors include corporate access as part of the investment process, according to industry surveys. A recent study of US investors conducted by BNY Mellon finds 97 percent prefer some kind of access to senior management at international companies before making an investment, and one in five say meeting executives is a requirement.
Peterson points out that humans are generally not good at anticipating how much they could be influenced. ‘I recall a study of reciprocity with something as simple as giving a pen to a doctor with a new drug’s name on it,’ he says.
‘More than 80 percent of the doctors said such a gift would not bias their own prescribing, but they also said more than 80 percent of their colleagues would be biased in their prescribing practices by such a gift. So even if we know something might bias us, we don’t believe it will – it will only bias ‘the other guy’ since we over-confidently believe we are above such bias.’
You win over investors with a very rational story around forecasts and growth but you tend to keep them by building a relationship
Richard Orr, Gather London
Dual approach What advice would Riviere give about building a more emotional bond with investors? After many years of trial and error, he says the best approach is to split reporting the numbers from building relationships. Results presentations should focus on getting the data across, making sure it is understood and helping analysts update their models, he suggests.
If I was going to invest in your business, I would want to know you’re listening to and doing the right thing for all of these stakeholder groups
‘If you try, at the same time, to introduce too many new people or concepts, or combine it with an office tour or event, then you don’t land either message,’ he cautions. Bringing the story to life and making it exciting can be more challenging in some sectors than others, notes Riviere, but everyone should be able to manage it.
‘At a company like WPP, it’s incredibly easy, because we’re a creative business,’ he says. ‘People might say, What about a bank or insurance company? What are the right-brained approaches there? But I think they also exist, and it comes more from people and storytelling. It’s about making sure you have as broad a base of management as possible accessible and available to investors.’
You can emphasize positive things when you speak about your company, but you shouldn’t try to be a spin doctor, nor should you try to manipulate
Patrick Kiss, head of investor and public relations at Deutsche EuroShop, a shopping center manager, says the extent to which companies should try to build an emotional connection with investors goes to the heart of what investor relations should be.
‘I’m on the side of the ones who see investor relations as active stock marketing within guard rails – not as freestyle as public relations,’ he says. ‘You can emphasize positive things and present yourself convinced and emotional when you speak about your company, if it is honest, but you shouldn’t try to be a spin doctor, nor should you try to manipulate.’
Riviere says that, of course, companies should not try to create a misleading or false picture to get investors to fall in love with a company. But building emotional bonds through people, culture and products can, alongside financial performance, help to keep investors on the share register.
‘I want investors to think that, if two companies are growing at the same rate on the same multiple, there’s something in my mind that tells me I just prefer WPP,’ he says. ‘It’s definitely something they couldn’t put in a spreadsheet.’
