How building a shareholder base of “best owners” creates strategic alignment, increases predictability, reduces volatility & optimises value

04/07/2024

By Andres Luther & Thilo Goodall-Rather, both Partners at H/Advisors Hirzel.Neef.Schmid.Counselors

In their book “Value: The Four Cornerstones of Corporate Finance”, Tim Koller, Richard Dobbs and Bill Huyett claim that the value of a business depends also on who is managing it and what strategy they pursue. But what defines the “best owner” of a company? As leaders in publicly listed companies with its combination of shareholders, board of directors, and CEO-led executive board, you cannot choose your owners, but you can create conditions to build a strong shareholder base.

In our 20+ years of experience in strategic communications and in investment management and analysis, we have witnessed firsthand the critical role of ownership. In most companies the leadership meets shareholders and investors regularly, yet far too often they do not know them, understand them, and engage with them for the benefit of the company. In this piece we share a few thoughts on what needs to be considered and implemented to build the best ownership for a public company.

  1. Know yourself before you look for your best owners
    A company is always valued compared to its peers. Understand your place in the industry, in the market. Seek a position in a segment that offers the best possible valuation. Sense of realism will be valued. Do not try to be a technology company when your business model or balance sheet tells a different story. Financials and performance speak louder than words. Understand your financials and performance and explain them in a way that helps investors build their investment case.
  2. Diversification matters
    Try to have a diversified shareholder base, united by common interests. Passive and quantitative investors are important for liquidity. Diversify between investors focused on sectors and pursuing certain strategies. Appreciate the opportunity to engage with activists.
  3. Build a core group of supportive shareholders
    A group of shareholders which control 20% or more can provide you with the opportunity to plan for the long-term and engage with owners beyond the Board Room.
  4. Understand market dynamics
    The market is always right. Understand how your shareholders’ actions are shaped by the market, understand their incentives, understand their vulnerabilities. Understand matters of timing.

What is the role of communication and capital market positioning to attract the best owners and create value?

– Given the lack of precise positioning of many companies, classic investment styles such as “growth” or “value” have become increasingly blurred with strategies such as GARP (“Growth at Reasonable Price”) or “high dividend”. As a leader you must position your company and the management team clearly to remain competitive for one of the 20–50 positions in an actively managed portfolio. The ability to stand out in a crowded universe does not only require convincing KPIs (Key Performance Indicators) and strong performance, it also requires concise, differentiated communication and relationship management that is tailored to investors. And, stick to industry KPIs (Key Performance Indicators), inventing new KPIs most often creates more confusion than clarity.

– The digitalisation of markets, and in particular the emergence of large amounts of data and the use of artificial intelligence with algorithmic models has led to the commodification of quantitative approaches. As a result, any possibility for alpha generation, i.e. the achievement of excess returns, must stem directly from the most important performance drivers such as corporate strategy, management, ownership, intellectual property, technological differentiation, diversification of supply, evaluation of talent and corporate culture. Articulate the most important performance driver clearly.

– The importance of supplementary qualitative information will increase. If you want to protect and create value in a market increasingly dominated by algorithmic trading and passive strategies, your company must differentiate itself in the fight for capital. This requires knowledge on those value drivers that are important and specific to relevant investor objectives — be they equity sector experts, family offices, or in certain cases even private equity. The complexity and the requirements in terms of information content are much higher, while the demands for speed and responsiveness have increased massively. An important measure is to benchmark your company to your peers, their qualitative disclosure and communication.

Strategic communications recognises that investor relations is not about reporting financial information and spinning an equity story. Effective investor relations is about engaging with shareholders as owners. It is about providing them with the information to understand the investment and reach a convincing investment decision. It is also about benefiting from the opportunity to learn from smart people who know the industry. This dialog between potential partners is the foundation of the best shareholder composition and a key element of the best owner principle for public companies.

Andrés Luther

Partner

Andrés Luther is a strategic communications advisor who works with clients at the intersection of financial services, technology, and capital markets. He is equity partner of Hirzel.Neef.Schmid.Counselors and a member of the Board of H/Advisors. Until 2014 he was global Co-head of Corporate Communication at Credit Suisse. Prior to that he was Head of Communications and Investor Relations at Day Software, which is today part of Adobe.

Thilo Goodall-Rather

Partner

Thilo Goodall-Rather is equity partner of Hirzel.Neef.Schmid.Counselors. He has over 20 years of experience in corporate analysis and the development of corporate strategies and market positioning. As a member of various boards and management bodies, he has drawn up and implemented corporate strategies and communicated these to various audiences. Most recently, he was responsible for corporate analyses, investments processes and investment decisions at Frankfurter Bankgesellschaft Gruppe. He gained experience of ESG (Environmental, Social and Governance) strategies in his position as Head Portfolio Management at SAM Sustainable Asset Management AG.