How to find the strategic shareholders.

Many companies go about investor relations all wrong, pitching their companies and plans to whatever audience they can and hoping some shareholders will buy in. This approach wastes time and valuable resources building relationships with the wrong shareholders who do not bring the right competencies, connections, and commitment to a business. Managers tasked with investor relations often believe their role is to “sell” the business — or the strategy the company pursues — with the sole goal of retaining and attracting as many shareholders as possible. Rather than selling a strategy in investor relations, managers need to think strategically about investor relations and the right shareholders they need for their business. By co-analyzing a company’s strategy with the shareholder landscape, managers can identify and attract strategic shareholders, who can help their business thrive. We have found this is best done with a five-step approach to strategic shareholder management.

Many managers today approach investor relations as a marketing exercise: pitching the company’s business and strategy to as broad of audience as possible in anticipation that some shareholders will purchase the company’s stock. They hope this will further boost the stock price and keep the company’s directors and other shareholders satisfied. In other words, investor relations often uses a dragnet, whereby managers cast nets into an ocean of shareholders in hopes that they catch some of them.

Companies should instead apply a targeted approach to investor relations with the aim of finding strategic shareholders. Strategic shareholders are those that stand to bring the greatest competitive edge to a business — not just their capital and contentment. To execute and support winning strategies, companies today need strategic shareholders more than ever.

Our research shows that having the right shareholders in a business can help a company achieve its strategic goals and amplify value creation to outpace its competitors. In essence, the right shareholders can in themselves create a competitive advantage for the companies in their portfolios. Given the current approach that many companies use for investor relations, this may seem hard to fathom, but it’s true, and we explain why and how winning companies do this.

What are Strategic Shareholders?

Well-crafted competitive strategies enable companies to outperform rivals in product markets. These strategies typically require three things.

First, companies must develop valuable and hard-to-imitate competencies, such as positive reputations, technological expertise, and logistics excellence, which provide sources of competitive advantage. Second, successful competitive strategies require companies to manage dependencies with key stakeholders, including regulators, activists, and the media. Third, companies must establish business connections with strategic partners that can support the strategy, such as an alliance partner in a foreign market. When done well, these three factors will facilitate a company’s competitive strategy and its dominance over competitors.

Some shareholders, we have found, can provide the three inputs necessary to build and execute a successful competitive strategy. That is, they provide the means to build valuable competencies, manage key dependencies, and facilitate the business connections companies need in competitive markets.

Competency builders

Some shareholders can help companies develop competencies. Private equity investors are known for building concentrated portfolios in companies in sectors in which they have deep expertise. To win over other shareholders, activist investors need to conduct rich research to thoroughly understand an industry, which managers can then tap into. From our many discussions with directors, it is evident that activists appoint some of the most knowledgeable and capable directors available. Even big investors are structured into groups that develop rich insights in a domain, which can be shared or transferred among firms.

By tapping into the insights of investors, companies can learn in advance about emerging industry trends, new technology opportunities, potential geopolitical shocks, and customer inputs. Companies can also access valuable human capital from investors. Some investors have deep networks and recruitment expertise that savvy companies in their portfolios may utilize to find new talent.

Dependency managers

Shareholders can also manage dependencies for companies. Companies are dependent on a host of stakeholders to maintain and build their business, including regulators, activists, rating agencies, politicians, the media, and so forth.

Using big data, our research shows that shareholders can help companies manage dependencies with these key stakeholders. For example, we have found that companies receive better more positive coverage from media outlets that their investors own. This results in these companies being cast in a better light — to both the companies’ and shareholders’ benefit. Similarly, we have found that companies receive more favorable ratings from rating agencies that their investors own.

The same could be argued for relationships with regulators, politicians, NGOs, and others: having investors that have some control over these stakeholders can benefit these investors’ portfolio companies. It is up to savvy managers to attract and retain such connected investors.

Connection makers

Finally, shareholders can facilitate new business connections for companies. Many shareholders today have broad portfolios that connect them to many different companies. Shareholders that understand these companies well can play a brokerage role that enables them to make different connections between companies in their portfolios.

One study finds that shareholders facilitate mergers and acquisitions (M&A) by helping their portfolio companies identify M&A targets in other areas of their portfolio. The same is true for strategic partnerships, licensing deals, and buyer/supplier contracts. Tapping into the network of investors can be especially beneficial for companies that are looking to enter new product or geographic markets, and for companies that are looking to collaborate to erect barriers that make it harder for new entrants to compete.

Some venture capital funds are especially good at keeping up with trends and identifying promising upstarts with innovative and sometimes disruptive business ideas. Leading companies we’ve worked with have developed relationships with venture capital partners to gain access to their innovation insights and broader portfolio of firms, which could lead to direct corporate investment.

A Limited Pool

Importantly, not all shareholders offer all three of these advantages — or even any advantage. This is precisely the problem with current “dragnet” approaches to investor relations: companies attract shareholders that fail to add strategic value to the unique business and strategy.

Adding a further challenge, when managers understand the value that some key shareholders can offer, those shareholders are going to be quickly sought after. And once these shareholders’ resources are exhausted, having been invested in competitors, some companies will find themselves far behind, forced to abandon the benefit of having strategic shareholders.

Though the pool is limited, managers should not lose hope. A critical opportunity comes from the fact that companies pursuing different strategies will have a different set of shareholders that can be considered strategic — the shareholders that add value to their unique business.

Targeting Strategic Shareholders

So how do companies identify these strategic shareholders and obtain the benefits they can provide?

The first step is to shift the mindset of investor relations programs. As we noted, managers will benefit by not approaching investor relations as an exercise to attract whatever shareholders can be sold on the company’s strategy. Moreover, the goal of investor relations is not to simply “placate” shareholders, but to tap into the expertise and connections that shareholders offer. Most companies use their investor relations department, if one exists at all, to field phone calls from shareholders, track shareholder transactions, and keep a pulse on the market to identify when an activist may come knocking. The focus is primarily on defense, with limited emphasis on offense. And the offense that does exist is mainly oriented to attracting what is popularly deemed “patient capital,” money from shareholders with long horizons who will sit back and not cause trouble. Sadly, many management teams hope their shareholders will not cause a stir or offer their opinions. This mindset creates a hurdle to attracting the most beneficial shareholders — the strategic ones — and tapping into the benefits they offer.

The second step is to ensure all investor relations personnel know in depth the company’s strategy needs. During conversations with investors, managers need to look for opportunities to tap into their expertise, and this can best be done when those managers know what to look for based on what their business needs — new competencies, certain dependencies managed, or new connections. This is typically easier for CEOs and senior strategy officers, and harder for some directors and investor relations personnel who are not deeply involved in the company’s strategy formulation process. Structurally, this can be overcome by moving investor relations closer to corporate development.

Third, managers need to identify the list of shareholders who will bring the necessary inputs for their business. This requires mapping the current shareholder base to identify gaps and regularly surveying the shareholder landscape to identify new shareholder prospects. For this, we have found big data can help to identify shareholders with unique portfolios (e.g., concentrated deeply in certain sectors) or positions (e.g., a large stake in a leading media company) that might be of use. From here, we encourage companies to develop detailed shareholder profiles of those that are deemed to be of strategic importance.

Fourth, once identified, shareholders with promising expertise or connections need to be engaged. Depending on what is being sought by management, it can help to move beyond meetings with the investor’s portfolio managers and seek more senior affiliates. Engagement can be tricky, and it helps when managers and directors choose the right forum, where both sides are comfortable but engaged. We have found face-to-face meetings in the company’s or investor’s office work best — rather than investor conference calls or roadshows. Like others, shareholders want to express their ideas and believe they can help. In some cases, when a shareholder is of sufficient strategic use, the nominating committee of the board may offer them a board seat.

It also helps to approach these engagements with care and a healthy amount of criticism. Currently, most managers approach shareholders as many job candidates do when seeking employment: putting all their concern on selling themselves and forgetting to ask questions of the employer to ensure there is a two-way fit. Managers need to learn about shareholders to gauge their richness and depth of expertise and what value they might bring to the business. Once that value is deemed positive, then it is time to go into selling mode and try to get the shareholder to buy into the company, turning them from a passive asset into a source of competitive advantage.

Avoid Pitfalls

Despite the importance of strategic shareholders to a business, there are two notable pitfalls that managers need to be mindful of in managing relationships with these shareholders.

First, managers should not rely solely on expertise and connections provided by strategic shareholders prior to making strategic decisions. In one study we found that if managers choose to diversify into a new industry without doing their own due diligence because their strategic shareholders have themselves invested heavily in the industry, their decision to diversify can compromise the companies’ competitive edge and destroy shareholder value. The lesson: blindly imitating strategic shareholders will not produce a sustainable competitive advantage.

Second, managers need to be aware that strategic shareholders’ incentives can sometimes misalign with the interests of their portfolio companies. This occurs because shareholders with broad holdings prioritize their overall portfolio returns, not the value of any single company. Some studies warn, for instance, that when shareholders hold ownership simultaneously in industry rivals, they may pass proprietary information from firms in which they have less ownership to firms in which they have greater ownership. To avoid this risk, managers need to extensively analyze strategic shareholders’ holdings and broader interests, paying special attention to where these shareholders jointly own industry rivals.

Though most investor relations programs are designed to attract the broadest and largest set of shareholders, companies will unlock the full potential of their shareholder base only when they apply a more strategic approach to investor relations.The body content of your post goes here. To edit this text, click on it and delete this default text and start typing your own or paste your own from a different source.

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Alessio De Filippis, Founder and Chief Executive Officer @ Libentium.

Founder and Partner of Libentium, developing projects mainly focused on Marketing and Sales innovations for different types of organizations (Multinationals, SMEs, startups).

Cross-industry experience: Media, TLC, Oil & Gas, Leisure & Travel, Biotech, ICT.