Perception studies: how to read an investor’s mind

‘So what’s happening with the stock?’ When your CEO asks you that perennial question, he or she is really asking for insight into what investors are thinking.

That question behind the question is much more difficult to answer, yet you, as IRO, are supposed to be channeling investors’ thinking. After all, you are supposed to eyeball to eyeball with the financial markets and have your finger on the pulse and ear to the ground as you take the temperature of the Street. As anatomically impossible as that may be, as an IR professional you are still expected to come up with the answers – and the easiest way to know what your investors are thinking is to ask them. But here’s where it gets tricky: you have various options depending on the questions you need answers to, how quickly you need those answers, what you intend to do with them and how much your budget can bear.

Here then is a guide, developed after conferring with several vendors and consulting my own experience from more than two decades in IR, to help you look at what you’re already doing in a new light or, if you’ve never surveyed your investors, to navigate the myriad options and come up with the most effective and efficient way to answer that question behind the question: what are investors thinking?

More than a mind probe

‘In-depth conversation’, ‘candid feedback’, ‘actionable intelligence’, ‘custom built’, ‘targeted respondents’: these are the terms one hears repeatedly when talking with the host of IR consultancies offering traditional perception studies. While they can be the IR equivalent of putting your investors and analysts on a psychiatrist’s couch, consultants advise that perception studies should be more than just a mind probe.

Practitioners all stress that their studies produce management recommendations that are ‘actionable’. They are unanimous that if a report just sits on an IRO’s shelf, it’s a waste of money. Equally important, they uniformly stress that companies value investor input. Robin Auten, managing director of Ipreo’s global perception analytics, says some clients present major study findings at their investor/analyst day events and management then responds to the questions and concerns raised. A company doesn’t need to agree with every piece of feedback, she observes, but when it does disagree it ‘needs to articulate why it is taking a different path to create shareholder value.’

The best insights come from two- way conversations, not a fill-in-the-box questionnaire. To achieve that dialogue, the interviewer needs to know what both the company and analysts have been saying. Lisa Rose, senior managing director at Dix & Eaton, describes the necessary qualifications for an effective interviewer, saying he or she should ‘get the language of the street and of the company.’

Perception studies, even if done regularly, never occur in a vacuum. Faisal Kanth, founder of London-based IR consultancy Fairvue Partners, stresses the importance of context. For example, knowing fund managers’ investment mandate and whether they are sitting on a gain or a loss on your stock can be crucial when planning the study. ‘Understanding those dynamics is really important before starting work,’ Kanth says. It’s also important to pay attention to what respondents are not telling you. If descriptions of senior management ignore qualities your executives consider a strength – such as strategic vision – your communications can address that gap.

Go the distance

Expanding the pool of respondents beyond your top shareholders can also pay off. David Calusdian, executive vice president and partner at Sharon Merrill Associates, says feedback from second-tier analysts and investors can provide valuable insight into the milestones they are watching for before initiating coverage or increasing their positions. And including a few respondents that don’t hold your stock but are on your strategic target list can encourage them to do their homework and initiate a position.

Elena Doom, former IRO at Honeywell and currently a managing partner at Corbin Perception, recounts how Honeywell had ‘an epiphany’ when the company realized its annual perception study could be the blueprint for crafting management presentations at its annual analyst day. Using it this way required that Honeywell begin the study anywhere from four to six months ahead of the analyst meeting, Doom recalls. It also ensured senior management buy-in when setting the study’s objectives and proved ‘a very effective tool’ to involve divisional leaders in the IR process as well.

As valuable as a perception study can be, Kanth cautions that IROs need to remain the authority on their investors. If an IRO is surprised by the findings of a perception study, he or she is ‘probably not doing the job as well as he or she should be.’

Investor perception studies: a guide

Description
One-on-one interviews with investors and analysts for a specific named company, combining open-ended questions and quantitative responses

Key advantages

• Provides analysts and investors an opportunity to give direct, candid input
• Provides in-depth feedback from your most knowledgeable investors

Intelligence to be gained
In-depth understanding of investor perceptions and expectations across a range of topics, including:

• Perception gaps vis-a-vis strategy, goals and execution
• Management strengths and weaknesses
• Valuation drivers
• Capital structure, uses of cash
• Governance issues
• IR program effectiveness, responsiveness

Primary audiences
C-suite and board of directors

Best practices

• Conduct a perception study early in the tenure of a new CEO as a benchmark, then repeat after a year
• Use perception study output to help guide messaging for analysts day
• Report investor feedback from the most recent survey at your analyst day, providing management’s response to comments and criticisms, describing actions taken in areas of concern
• Use perception study interviews to raise your company’s visibility with potential new shareholders and analysts

Costs
Varies but typically $20,000 to $50,000

Limitations

• Can take six to eight weeks to complete
• It can be difficult for interviewers toreach the most knowledgeable key analysts and investors
• Question areas limited to 12-15

Other considerations
A perception study sets up expectations that management will act on investor input. If investors see no response, credibility gets undermined. Interviewers should know the company story, be familiar with what you’ve been saying and speak the language of your company and industry. Build a study into your annual budget. You can vary the frequency as appropriate but consider doing a study at least every 18-24 months

The savvy IRO corner

• Get senior management buy-in up front, then it will be waiting for the results
• The feedback can be a powerful outside-in view to reinforce what you’ve been telling management
• Focus messaging on what matters and what’s going to move investors to act

Intelligence gathering beyond perception studies

The following section provides some ways to think about gathering market intelligence beyond the deep dive into investors’ psyches that a full-blown perception study offers. For instance, while the formal study can provide benchmark data on industry peers as well as your own company, the focus of a perception study should primarily remain on your company. A less expensive market survey can add valuable insight into IR best practices at a fraction of the cost and without diluting the company-specific nature of a formal investor perception study.

Then there’s the very practical and tactical information gathering that is a daily part of every IRO’s routine, vital to an effective IR program but well outside the scope of the gold-plated perception study. Informal email or online surveys may well fill that need. Consider each tactic an arrow in your IR quiver, aimed at answering that question behind the question: what are investors thinking?