The notion of ‘investor brand’ needs some explanation. Even the more general and familiar concept of ‘brand’ is prone to be nebulous and controversial. Everyone thinks they know what it is — which alone precludes general agreement — but very few people can provide a clear definition when asked to do so.
Branding is powerful because it draws in equal measure on the Aristotelian notions of logos and pathos. An appeal to reason as well as the emotions. Add a credible and engaging source (ethos) and you have a resilient platform that adds far more measurable value than any products and processes on which a business is based.
To paraphrase the wisdom of Maya Angelou; people will forget what your CEO says and even what your company does, but they will remember how your brand makes them feel. The fact that every teenager with a smart phone views themselves as the curator of their own ‘personal brand’ proves the concept is embedded in our collective psyche. It matters.
Investor branding is all about structured long-term engagement with the market. It empowers a company to define for itself how it is perceived. It paints a picture of the future and shows a path to get there. It invites investors in and makes them feel more secure. It builds trust. A well-considered and consistently reinforced investor brand will build a buffer around your business and its financial performance.
For corporations engaging with investors, understanding how to build and protect their investor brand is critical for growth and longevity. This is particularly so for listed companies whose market capitalisations are composed in large part of ‘intangibles’ that are intertwined with the out-workings of ‘brand’; and, which are subject to swift and sometimes lasting retribution from consumers, regulators and investors when things go wrong.
What investors really want
There is an instructive scene towards the end of the first Godfather movie where Michael Corleone confronts his brother-in-law, Carlo Rizzi, to demand a confession for his complicity in the death of Sonny Corleone. The dialogue that ensues represents the final act on the day chosen to ‘settle all family business’.
While it doesn’t end well for Carlo, this scene offers valuable lessons for reporting entities in a modern business environment which, much like the world of Mario Puzo, is volatile, dynamic and ultimately unforgiving.
Michael tells Carlo that his allies are dead and that he knows he is guilty. After lulling Carlo into a false sense of security, he utters the chilling and memorable line; “Just don’t lie to me...don’t tell me you’re innocent, because it insults my intelligence and makes me very angry.”
Now, think of your typical fund manager or asset allocator. Investors have a lot riding on the decisions they make. Their operating environment is just as unforgiving as yours. They are paid to be curious, sceptical and persistent; not trusting and tolerant. They rely on a myriad of data points and credible sources. So, your voice is only one of many. Their world is replete with information and alternatives and their rewards are clearly linked to their success here and now.
This can create a polarised relational dynamic. Companies will either struggle to get the attention they deserve for the good they do or will be subjected to rigorous and intrusive interrogation of detail when things go bad.
Investors want to know that companies are working to a considered long-term strategy and are not captive to the latest fad or the loudest stakeholder. At the same time, they expect them to be alert, responsive and agile. Setting sail without a compass is foolish but dogged faith in an obsolete plan is no better. This creates a delicate balance that must be respected. In the words of Sun Tzu, “Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.”
Society is changing and nobody trusts you
Deloitte’s recently published Global Millennial Survey rings a warning bell for companies in relation to the way they are perceived and what is expected of them. The number of respondents in the 2019 survey who believe that “business has a positive impact on wider society” fell to 55%. That figure was 61% in 2018 and over 70% from 2014 to 2017.
The survey, which also included Gen Z, incorporated the views of over 16,000 respondents from 42 countries. These groups do not think highly of leaders’ impact on society, their commitment to improving the world, or their authenticity. In general, they will patronise and support companies that align with their values, but many will disengage with and even boycott a company when they disagree with its business practices, values or political leanings.
The Edelman Trust Barometer 2020 was just as stark in its findings. Publish-ed in January of this year, it collected data from over 34,000 respondents in
28 markets through an online survey.
It documents a general decline in trust in the four types of institutions measured; business, government, NGOs and the media. No institution was perceived as both ethical and competent. Business did not fare well on either measure. When displayed on a scatter diagram, respondents placed business into a dubious quadrant in 16 of 28 markets — perceived narrowly as competent, but also as unethical; including Australia.
The growing distrust of the global economic order poses an existential question for companies and investors. 56% of respondents agreed with the statement, “Capitalism as it exists today does more harm than good in the world”.
Changes in popular attitudes inevitably manifest in consumption patterns and political volatility. They eventually lead to regulatory intrusion, legislative change and have implications for investor activism and flows of capital. We are seeing this today in the rise of populist governments, xenophobic nationalism and economic protectionism.
Investors are human and not as rational as you think
It may be tempting to dismiss these findings and instead to put our trust in the rationality of investors and the resilience of markets. This would be a terrible misreading of both the zeitgeist and of human nature.
Research over the past 20 years shows that investment decisions are heavily influenced by factors that we would class as ‘irrational’. This ranges from whether an investor ‘likes’ a company or not, to the amount of cloud cover on a given day.
It has been established that a feedback loop exists between the intellect and the emotions. Cognitive evaluations induce emotional reactions which in turn influence subsequent cognitive evaluations. Feelings are especially significant when operating in conditions of uncertainty. Arguably, this could describe every investment market all of the time.
It is here where a strong investor brand makes a huge difference. In times of heightened uncertainty, investors will shift their weight from systematic processing of data to the realm of ‘instinct’, where feelings come out to play. This is actually a logical response, as it reduces what is known as ‘deliberative cost’. It is a faster and more efficient way of making decisions. A tennis player would call it ‘taking the percentage shot’. Jack Welch would think of it as preferring ‘a good decision today over a great decision tomorrow’.
A company’s investor brand is the active ingredient that shapes the decisions investors make when the company most needs their support.
Investor brand and sustainable investing are closely linked
The empirical link between good governance, environmental and social practices, and good financial returns is now well established. Cognitively diverse boards make better decisions. Open and inclusive corporate cultures produce better operational outcomes. Understanding long-term environmental patterns and risks results in better business planning. Employee engagement promotes productivity, guards against potential scandal and creates valuable ambassadors for the business. ESG reporting is not a fad. It’s good long-term risk management.
A report published in late 2019 by Morgan Stanley found that 86% of individual investors now believe that ESG practices can potentially lead to higher profitability and may be better long-term investments. Investors are looking for a greater range of sustainable financial products and 84% of respondents want the ability to tailor their investment portfolios to match their values.
Numbers speak louder than words. Ethically screened investments are generally outperforming the market. Recent research by Responsible Investment Association of Australasia (RIIA) found that Australian superannuation funds that comprehensively engage in responsible investment are outperforming their peers over one, three and five-year timeframes. This is largely due to negative screening, which sifts out companies which do not make the cut on ESG measures.
The future of capital allocation. An offer you can’t refuse
In January of this year the CEO of Blackrock, Larry Fink, created a huge stir with the publication of his annual letter to investors. It confirmed that Blackrock will incorporate ESG metrics in its investment strategies; will expect companies to report on ESG measures; and will increase its positions in sustainable investments and start divesting from companies that generate more than 25% of their revenue from thermal coal.
State Street Global Advisors (SSGA), another funds management behemoth, also weighed in. Its President and CEO, Cyrus Taraporevala, complained that “unfortunately, fewer than 25% of the companies evaluated by SSGA had meaningfully identified, incorporated and disclosed material ESG issues into their strategies”. Seeking to change this, he has launched the ‘R-factor’ (R for Responsibility), adding “SSGA believes a company’s ESG score will soon effectively be as important as its credit rating”.
Global governance advisor Morrow Sodali points out that these two fund managers, along with Vanguard which completes the big three, control a combined $14 trillion of funds and a quarter of the votes cast at S&P 500 companies — a figure which is expected to grow to more than a third in the next 10 years.
The average investor agrees. RIIA research indicates that 9 out of 10 Australians expect their money to be invested ethically; and that 4 out of 5 investors would be prepared to switch funds if their current fund engaged in activities that were inconsistent with their values.
The exit of the world’s largest sovereign wealth fund Norges from fossil fuel investments and the partial divestment by Saudi Arabia of its oil reserves provides more anecdotal proof of the momentum around this shift.
Building a robust investor brand is best practice
The importance of building a consistent and authentic investor brand narrative is underscored by an inconvenient truth. Most of the time, people are not listening and when they do, they don’t believe what they hear.
What a company says and what it does must be aligned. Authentic communication requires knowing who you are and what you stand for, and clearly and consistently delivering that message to the market. Even more importantly, each interaction with every team member within the company and every stakeholder outside of it should reinforce that brand voice. Otherwise, it’s just marketing.
The Corporations Act and the Listing Rules provide some boundaries around accuracy and disclosure, but they still leave plenty of wiggle room for companies to obfuscate and misdirect, if they are so inclined. It is ultimately up to each reporting entity to decide whether it wants to merely comply with minimum standards or distinguish itself through ‘best practice’.
Perhaps the most important thing to remember is that investors hate surprises. Just like Michael Corleone, they don’t like to be lied to, either actively or by omission. It insults their intelligence and makes them very angry.
A focus on investor brand provides an alternative lens through which investors can view a company. It is proactive in creating a narrative for investors rather than vacating the field to the often competing views offered by stakeholders.
Naturally, there must be a business case for any investment in investor brand just as there ought to be for every decision a company makes. We can and should quantify all relevant risks in dollar terms to justify that investment. This is easier now than it used to be.
Today, there is plenty of data showing that a good reputation and a strong investor brand can deliver better margins, a lower cost of capital, less intrusive regulation and time to regroup when crises occur. And they will.
While an investor brand is intangible in the strictest sense, it is actually the most solid foundation on which to build long-term value. Properly curated, it will deliver more growth, opportunity and longevity than any other facet of a business.
Mario Falchoni is the Managing Director of Retorix