Investor Expectations

Clarify investor expectations as a basis for strategic planning.

The CEO should agree performance targets with the board of governing directors. This is usually with the chair of the governing board. The board’ job is to represent the requirements of the intended beneficiaries. In a business, we mean investor expectations.

What Do the Investors Want?

What do the intended beneficiaries of an organization want? For example, what matters most to the owners of a business? Do they all want to 'maximize' their financial return on investment in the near-term? Books on corporate strategy often assert this. I counsel against adopting corporate objectives in which the words 'maximize' or 'minimize' occur. These objectives are usually defective. There are two problems with objectives such as, 'We aim to maximize ….' or 'Our goal is to minimize costs….' or, '…. as much as possible'.

First, no one can verify whether this achievement. How can anyone be sure, that the profits of a company last year were 'maximized'? Is it conceivable that its performance could have been higher? Will an accountant sign a declaration that they certify the company maximized its profits? Or, that it costs minimized its costs. Or, that it could not have extracted one more dollar. If you cannot tell whether you have achieved a goal, there is no point in setting it! Not even if this seems to be how investors express their expectations.

Second, I am not sure that many companies do want to 'maximize' their profits. Do many companies go to any extreme to earn more profits? Would they ignore all risks? Would they cast aside all decency? Would they do these things to extract the last tiny bit of profit? Would they put future earnings capacity at risk in these ways?

The Argenti Process of Strategic Planning is unique in that it includes a detailed list of all sorts of defective objectives that should be avoided in strategic planning.

Let us return to the task of finding out what beneficiaries, such as shareholders really want.

Investor expectations vary among investors and
over time with the same investors

Each type of beneficiary may have different goals.

Before a board sets targets for the CEO and their team, they should learn what investors want.

Certainly, it is never easy. Often, the beneficiaries do not seem to know what they really want. Even when they do, they are seldom able to express their desires clearly. This is true if we are talking about business investor expectations. It is also true of the expectations of beneficiaries of various non-profit organizations.

Beneficiaries of companies are the investors or owners. They usually want high returns from their investments. They want to be able to say, 'we beat the market!' They revel in generous profits. Losses upset them. Some want to believe they are insightful and in touch with the latest devices of financial engineering. At the same time, they want respect for their commitment to ethical, socially responsible, and environmentally friendly use of capital!

These thoughts and emotions affect investor expectations. These motivations change over time.

Investor expectations and motivations are as varied as humanity itself. What is a Governing Board to do? How can it provide top management with a set of sensible, stable, performance targets? Many Boards simply avoid doing so. They expect top management to advise them on what basis they, the Board, should hold the managers accountable. This is not only logically up side down, but is a potential source of conflicts of interest.

To find out what investors really want ask them!

Easy to say, not simple to do. Different situations call for different modes of enquiry.

Here are some possibilities and suggestions about who to ask.

Note that, even when these questions have been determined, company boards face the technical matter of how to express these ambitions. Do they use Return on Capital Employed or Return on Equity? What about EBITDA? Will the same type of financial target do for both a group of companies and for a subsidiary or division?

To find out what beneficiaries really want - ask them!

Now turn to the same problem faced by all NPOs. Governing Boards in non-profit organizations face their own versions of these situations. Confusion comes with expectations raised by the popular stakeholder theory. This encourages governors to attempt the impossible. They try to govern in the interests of everybody that lays claim to a 'stake' in the organization.

Here, as for the companies above, the beneficiary doctrine, developed by John Argenti, offers a solution. He developed a detailed analysis of how NPOs may set targets that reflect the requirements of the intended beneficiaries.

For more information, see the Argenti Purpose Sequence.

Success starts with avoidance of failure

The next role of the governing board is to identify a minimum level of corporate performance. This level represents failure on the part of the organization. In the case of a business, what level of performance would be regarded as failure by the investors? This is 'Tmin. This is the absolute minimum acceptable performance.

The board must then ask, "Do we think there is a reasonable chance of exceeding this level?" If there is no real chance of performing above what is unacceptable, it is better to get out while it is still possible!

Satisfactory performance is OK

The next step is to set a level of corporate performance that will satisfy the intended beneficiaries. Following the suggested approach of the Argenti System of Strategic Planning, we call this 'Tsat'.

We end up with a bracket of targets. We have a target that the organisation must exceed. We have a target that would satisfy expectations.

The governing board, even if they have taken our recommendation to keep in touch with varied expectations, may find that the beneficiaries' wants and hopes are just not found in a reasonably short time or in a cost effective way. In such circumstances, the board must take the initiative.

In the case of companies, they can set the Tmin corporate performance level just above the ruling rate for the cost of using capital in the jurisdiction or industry sector where the enterprise operates. Then they should set the satisfactory level Tsat, sufficiently above this to constitute a significant operating challenge for the managers. This can be informed to some extent by review of similar or competing enterprises. This is the clue for NPOs; they should set these targets according to how their peers are viewed by their beneficiaries.

Corporate strategic planning begins with a clarification of the respective roles of beneficiaries, their representatives on the governing body and the senior executives, and the beneficiary or investor expectations.

Return from Investor Expectations to Organizational Effectiveness.

Return from Investor Expectations to Simply Strategic Planning Home Page.

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Understanding investor expectations is vital to an effective investor relations program. ADvice on setting up effective programs is available in these resources.