How Strategy Talk Creates Value
Investors appreciate hearing about a new CEO’s strategic vision, and they respond by bidding up the stock price.
Bottom Line: Investors appreciate hearing about a new CEO’s strategic vision, and they respond by bidding up the stock price.
Traditionally, CEO strategy presentations are derided as little more than “cheap talk.” After all, it doesn’t cost much to rent out that conference room, set up the video link, and paint a grand vision of the firm for investors and the press. Real strategy is decided behind closed doors, the thinking goes.
What’s more, sometimes these presentations are viewed as a ruse to throw off rivals by laying out an agenda the CEO has no intention of fulfilling. In this sense, strategy presentations have been compared to “vaporware” announcements, in which companies claim to be developing something that they aren’t in order to compel competitors to commit resources to a phony war.
But devising a strategy and selling it to investors is perhaps the key component of a CEO’s job. Some researchers have suggested that failing to follow through on promises, even vague ones, can do serious damage to a CEO’s reputation down the line, which can, in turn, send stock prices tumbling. These high stakes might give companies a reason to take strategy presentations more seriously. So might the trend toward transparency in business — research shows that one in five Fortune Global 500 companies gives strategy presentations in any given year.
According to a new study, more companies might want to follow their example. The conventional wisdom that views strategy presentations as little more than window dressing is seriously misguided, the authors found — at least when it comes to presentations made by new CEOs. The strategy presentations these CEOs make in the months following their appointment seem to soothe investors’ uncertainty, and tend to provide an immediate and significant boost to the firm’s stock price. “In this sense, contrary to skepticism from theorists of cheap talk, investors see strategy presentations as credible and economically significant,” the authors write. “Strategy talk matters.”
The authors analyzed new CEOs because their appointment is typically regarded as a moment of strategic change, when setting out a vision for the firm’s future provides investors with their first real indication of the priorities of the new person in charge. These strategy reviews also give investors a chance to assess the new CEO’s charisma, competence, and experience up close.
The authors obtained data on strategy presentations carried out by companies listed on the NYSE and Nasdaq from 2000 to 2010. To isolate the effects of CEO presentations, they eliminated firms that also issued announcements about dividends, earnings, mergers and acquisitions, major contract awards, lawsuits, or new products within a three-week period around the time of the strategy review. They also controlled for other relevant factors that could skew the results, such as firm size, stock-price volatility, and the number of analysts following a company.
The conventional wisdom that views strategy presentations as little more than window dressing is seriously misguided.
The authors focused on new CEOs’ public presentations to invited guests, such as financial analysts, shareholders, and media, which tended to emphasize firm-wide strategic initiatives as opposed to announcements about specific acquisitions, R&D ventures, or partnerships. These broad-based plans for the future also, by their nature, make few commitments — meaning that if conventional wisdom is true, these are the very types of presentations that should be dismissed by investors.
And yet, the opposite is true. In general, new CEOs who conducted strategy updates within the first 100 days of taking the helm saw their firm’s abnormal stock returns — or the difference between the expected price and the actual price — increase 5.3 percent the day after the presentation. That’s worth about US$450 million in market capitalization for the average firm in the sample.
But not all incoming CEOs are new in the same ways. The authors wanted to zero in on the types of new CEOs who generally cause the most anxiety among investors — those who have not been groomed by their predecessor, for example, or who come to the company from a different industry. Accordingly, the authors divided new CEOs into three categories. The first was internal, non-heir-apparent CEOs, who are promoted from within the company’s ranks but have not been part of the previous regime’s decision-making process. The second, CEOs hired from within the industry but outside the firm, should have been comfortable with the sector’s strategic landscape but would still be expected to shake up the company’s way of doing business. The final group, CEOs who hail from outside the industry and the firm, were usually seen as outsiders who brought with them a fresh perspective and a mandate for change. Because they were relatively unknown to analysts and investors within the industry, their appointment signaled the potential for the greatest upheaval.
Investors seem to place a premium on hearing from the CEOs they know the least about. For example, the strategy presentations conducted within the first 100 days by CEOs in the third category produced a 12.4 percent boost in their firm’s abnormal stock returns, worth about $996 million for the average firm in the study. External, same-industry CEOs saw a bump of 9.3 percent (worth $713 million), and CEOs appointed from within the firm (whom investors should be most familiar with) produced an increase of 6.1 percent in stock returns, or $519 million in market capitalization.
Despite their obvious payoff, strategy presentations were a little-used tool by CEOs seeking to manage investors’ expectations and anxiety, the authors found. Less than a quarter of the CEOs in the sample carried out a strategy review in their first 100 days, and just 39.7 percent made a presentation within their first 200 days. And timing is everything: The sooner a CEO holds court, the stronger the effects of a strategy presentation are.
Indeed, although external and inexperienced new CEOs were the least likely to give presentations shortly after being appointed, the authors found, they had the most to gain, given the enthusiastic investor response that greeted their strategy talks. “New CEOs and especially those that have external status should contemplate the upside potential of strategy presentations and the diminishing returns from delay,” the authors suggest.
Source: “Cheap Talk? Strategy Presentations as a Form of Chief Executive Officer Impression Management,” by Richard Whittington (University of Oxford), Basak Yakis-Douglas (University of Oxford), and Kwangwon Ahn (Peking University), Strategic Management Journal, Dec. 2016, vol. 37, no. 12