Will Your Investors Support Your Strategic Pivot?

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Most companies carefully cultivate close relationships with their investors. Corporate leaders, alongside their investor relations support staff, deliberately craft their communications to attract shareholders that support their firm’s business model, risk profile, and strategic narrative. Throughout earnings calls, investor days, and private meetings, shareholders are sold on a particular vision, and they’re expected to invest with the intention of seeing it realized.

But when a company pivots strategically, this carefully nurtured alignment can quickly disappear, creating a misfit with the investor base. Legacy investors—those drawn to the company’s original strategy and vision—can find themselves at odds with its new direction. In extreme cases the tensions can derail the company’s plans and cost top managers their jobs.

A critical mistake we frequently see when business leaders introduce a new strategy is that they become so focused on enumerating market opportunities, product demand, and earnings that they forget why their investors bought shares in their company in the first place.

To manage strategic change with an investor-informed lens, leaders should implement a three-step framework. 

1. Create Investor Scorecards.  The author’s approach involves identifying the companies in an investor’s portfolio and then scoring each of them on multiple measures across five categories: corporate risk tolerance, diversification, competitive aggressiveness, prosocial activity, and political engagement.  Then each company’s scores was weighted according to its size in the portfolio and calculate an overall average score for the portfolio on each measure.  Next we determine how much each investor’s average score on each measure deviates from the average score of all other investors, which provides a benchmark.  The scores indicate to a company how receptive a given investor is likely to be to specific changes in its strategic orientation. The company can see how much of a misalignment there is between its proposed strategy and a given investor’s preferences.
2. Diagnose Your Investor Fit Risk.  Once they understand each investor’s strategic preferences, companies can diagnose their overall investor fit risk for a strategic move under consideration. If a strategy involves only modest adjustments, standard investor communications may suffice. But when the move is more radical, a deeper analysis across the shareholder base is necessary.  Strategic pivots that depart from a company’s historical trajectory or break with industry norms unsettle investors.
3. Develop an Engagement Strategy Informed by Investor Risk.  Once a company has diagnosed the investor fit risk of its intended strategic move, the next step is to make a plan for engaging investors. It should reflect the degree of alignment (or misalignment) between the proposed strategy and the current investor base while also identifying new investors who can support the pivot and accelerate transformation.  If investor fit risk is low, the strategy is well aligned with current shareholders. But even in these cases, firms should not remain passive.   If investor fit risk is high, a more targeted approach is needed. Firms should consider a three-pronged strategy:  Engage likely supporters among current investors.  Address the concerns of “future-misfit” investors.  And identify and attract “future-fit” investors.

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