Are you aware that your reputation as a CEO has a material impact on how financial analysts estimate your firm’s worth? More specifically, your failure to manage that perception can leave an average of 16 percent of stock appreciation on the table.
We came across this insight while delivering a senior leadership program to a large, global pharmaceutical organization. In presenting to the group, the vice president of investor relations showed a chart of the most important factors influencing investment, according to 200 financial analysts surveyed by Corporate Branding LLC. More than 66 percent of them cited “strength of management” followed rather distantly by “the industry” (35 percent), “earnings performance” (27 percent) and so on.
A survey of 50 equity analysts from around the globe confirmed this insight—that the most important factor they consider in determining an organization’s stock price is not short-term operational efficiency, sales productivity or cost effectiveness; it’s the quality of the CEO’s leadership and how it contributes to that firm’s performance.
These findings may seem surprising, but while analysts interviewed followed a broad range of organizations and industries, most shared the same logic expressed by one respondent, who said:
“I look at 15 to 20 years of cash flow. Year one depends on the capability and engagement of the front line. The CEO can’t change these much in the next quarter or two. Years two through 20, however, depend on the front line’s ability to transform and capitalize on the changes in technology, consumers and regulations. This transformation depends on the CEOs and the shots they call.”
Analyst respondents were asked to explain how they assess the quality of a CEO of an organization they follow and how they use this assessment to estimate the value of the firm. While these analysts typically focused on cash-flow forecasting, adjustment for near-term risk and long-term risk, they referred to the same three criteria for judging the CEO’s leadership:
- Track record–Previous roles and challenges and the results achieved.
- Reputation–Experiences, stories, books and articles that describe the CEOs approach, character and confidence.
- Presence–Effectiveness in articulating the way forward, addressing opportunities, questions, concerns, crises and disruptions in plans.
When asked how much they had changed their valuation of stock price based on their assessment of leadership quality, an astounding 10 percent of respondents reported changing the price
in excess of 25 percent. The average was an impressive 16 percent. For most organizations, this is equivalent to five to seven years of organic growth.
The majority of analysts in our survey said they typically did not receive information from the organization that was useful in forming their judgment about leadership quality. Instead, the analysts gathered information about the CEO’s leadership from external sources, including peers, social media, articles, books, websites and trade shows. They also interviewed competitors, suppliers and recruiters.
What this reveals is that analysts do not take a quantitative approach to valuing leadership. Instead, they tend to rely on their “gut sense” and other subjective factors to evaluate leadership quality. We asked investor relations leaders why this was the case. One explained that “analysts recognize that leadership is too complex to be explained by a set of numbers. Therefore they subjectively judge leadership quality based on their experience and analytic routines.”
Despite their reliance on external sources, the analysts we surveyed said they would welcome more information from the companies they cover. In fact, 80 percent said they could be more accurate in judging leadership with better information from the organization.
To take advantage of the opportunity this finding represents, we suggest adopting the following three strategies:
- Understand the current view of your leadership brand: What do analysts who follow your industry currently think about your leadership qualities?
- Know key levers to pull: What sites, blogs and journals do analysts read? What opinion leaders do they consult?
- Model your CEO brand: What are the best opportunities to transmit your brand of leadership?
Some organizations expressed reluctance, asking, in effect, “What if the analysts tell us something we don’t believe or want to hear?” Brand experts would likely reply with the familiar truism that “perception is reality.” More to the point, the bottom line is that analysts are already making judgments, factoring them into stock price and thus monetizing your CEO brand. The question is, or should be: How you can help them do it more accurately?
Susan Dunn, Ph.D. ([email protected]) is a partner with Mercer Consulting and a former strategy consultant with McKinsey. Bruce Avolio, Ph.D. ([email protected]) is the executive director of the Center for Leadership & Strategic Thinking at the University of Washington’s Foster School of Business.