Investor trust: Business leaders must show how they deliver value

With 2022 in the rear-view mirror, board members and senior executives are turning their attention to the future and the challenges that lie ahead.

One of the key questions they must address is: How to maintain or enhance the value of their business in 2023? This task is made more complex by the ongoing economic uncertainty.

Regardless of whether a business is publicly traded, preparing for an initial public offering, or privately funded, the value of the company is ultimately determined by the last share price that investors are willing to pay.

And this last share price is essentially a function of two factors: performance and perception.

In today’s volatile economic environment, even companies with strong financial foundations and established track records can experience fluctuations in their valuation due to market dynamics. While these temporary gyrations are often forgotten when economic conditions improve, negative perceptions can quickly spread, causing investors to avoid the company, and leading to a downward spiral in market value.

Furthermore, investors today are increasingly scrupulous in their due diligence and less prepared to take bets on companies they find difficult to believe in. To create a positive impression among investors, business leaders need to show, not just tell, how they are delivering business value.

One way to keep the capital markets informed about a company’s performance and manage its perception among the professional investment community is an effective investor relations (IR) strategy.

When developing an IR strategy, it is important to recognise that, despite the evolution of global market dynamics, the fundamental investing principles have remained unchanged for more than 100 years.

Investors and analysts still seek to thoroughly assess companies and require ‘meaningful’ information to do so. The most successful companies understand this and focus on three key areas when developing effective IR strategies that can significantly impact the valuation of their company.

Building trust
It is completely reasonable to want to present your equity story in a manner that is authentic to you. However, investors are logical and analytical individuals who may quickly disregard an overly positive narrative. This often necessitates a shift in mindset from trying to sell your story to simply telling your story.

To effectively engage with analysts and investors, it is helpful to consider their perspectives and craft a corporate narrative within the context of the company’s industry. A data-driven approach that outlines the value and performance of the company and compares it to the financial performance and positioning of industry competitors, can be particularly effective.

Providing meaningful information
The renowned investor Peter Lynch once offered the following advice for those seeking to emulate his success: ‘Invest in what you know’.

This statement highlights the significance of having a deep understanding of the companies in which one chooses to invest. To effectively evaluate a company, analysts and investors must have access to meaningful information about its performance, strategies and opportunities.

This is not just about presenting raw financial data but also about communicating a compelling vision that inspires confidence and excitement.

To build trust with investors, it is essential to provide insights into key performance metrics and guidance that allow them to compare your company to the prospects of others in the industry. However, simply providing year-on-year or quarter-on-quarter comparisons is not enough to inspire investment.

Management must also demonstrate how the company has achieved these results and outline a clear business strategy that will enable it to capitalise on future opportunities while minimising risk. Most importantly, organisations and leaders must be able to convincingly link their strategic, financial, and operational achievements to future growth potential.

Addressing the right audience
Senior executives often waste their time trying to attract investors who are not suitable for their business. This can be avoided by carefully analysing shareholder registry information and targeting the right investors.

However, it is surprising to see how many organisations prioritise protecting their shareholder registry data instead of sharing this valuable information with investor relations teams. Doing so allows these stakeholders to fully utilise the information and understand the motivations behind investors’ decisions to invest in the organisation.

With this understanding, they can create profiles of potential investors and anticipate what might appeal to them.

In parallel, it can be beneficial to conduct an investor targeting exercise to identify potential gaps in the company’s shareholder register by analysing who invests in the organisation’s competitors.

A market feedback assessment, also known as a perception audit, can also be helpful in understanding how the target audience perceives the organisation, its products or services, and its market position.

Analysing the results of these exercises can provide valuable insights for enhancing the organisation’s investor relations programme.

Securing long-term performance
It is expected that most organisations will face macroeconomic challenges in 2023. In this environment, investor perception will be a key factor in determining the success of companies in the year ahead. As such, effective investor relations will be central to protecting and unlocking business valuations.

No matter where a company currently stands in terms of its investor relations maturity, implementing the above approach as an ongoing practice can help to build investor trust and confidence, ultimately supporting long-term stock performance.

By staying attuned to the expectations of investors and consistently communicating a compelling narrative and sound business strategy, companies can position themselves for success in a challenging market.

Oliver Schutzmann is the CEO of Iridium Advisors