What really drives the Investment decisions of Buy-Side Analysts? And how should CEOs manage them?
An extraordinary research study among Chief Financial Officers found that ‘78% would “give up economic value” and 55% would cancel a project with a positive net present value—that is, willingly harm their companies—to meet Wall Street’s targets and fulfill its desire for “smooth” earnings’ according to Harvard Business Review.
This is absurd.
It is even more absurd when you read all the recent research into the Investment Drivers of Buy-Side and Sell-Side Analysts.
One of the most recent was released by the world’s leading research company specialising in the Investment Industry.
Rivel Research’s 2015 Global Study of the Buy-Side’s Investment Process was based on extensive interviews with Buy-Side Analysts around the world.
The research is wide-ranging, but deep inside lie some fundamental findings.
And the most fundamental of all was this:
Short-Term Numbers are not the most important drivers of Buy-Side Investment Decisions.
There are two critical influences that are much, much more influential than the Numbers.
I’ll explain what those two influences are in a moment, but first let me share some other important findings:
Big Business Issues Aren’t Necessarily Big Investment Drivers
Interestingly, the research found that many of the most important principles for Business today aren’t particularly important for Buy-Side Analysts:
- CSR/Sustainability isn’t important: CSR/Sustainability is clearly the least important of all the 13 Drivers, way down at the bottom of the list, scoring only 22%
- Attractive Dividends don’t matter much: They are equally unimportant, right at the bottom, just above CSR, with 30%.
- Innovation isn’t fundamental, with ‘Innovative Products/Services’ scoring only 35%.
- Corporate Governance isn’t critical: Corporate Governance may be increasingly important within Business today, Buy-Side Analysts don’t see it that way, with Corporate Governance scoring below 50%.
Numbers Count, But They Aren’t The Most Critical
The most important Financial Measures are clear:
- Cashflow is King; a Strong Balance Sheet is Queen.
- Potential Revenue Growth, Sustainable Margins and Prudent Capital Deployment are all important.
- Attractive EPS Growth is a little way behind – and Attractive Dividends don’t matter much.
But the two most important Investment Drivers are not Financial.
They are much more important than short-term numbers.
The two most Important Investment Drivers are those that create Investor Confidence and Long-Term Value
The two most important Investment Drivers for Buy-Side Analysts were:
72% Management Credibility
69% Effective Business Strategy
These findings are consistent with earlier Rivel research among Sell-Side Analysts, which also found that the two most important drivers of Sell-Side motivations were ‘Management Credibility’ and ‘Effective Business Strategy’:
Rivel’s most recent study includes the findings from their latest Survey of the European Buy-Side.
And in Europe in 2016, ‘Reliable Cashflow’ was this time rated as the No.1 Investment Driver.
But both ‘Management Credibility’ and ‘Effective Business Strategy’ were ranked as equal No.2 – well ahead of ‘Strong Balance Sheet’, ‘Sustainable Margins’, ‘Attractive EPS Growth’ and other Financial Criteria:
Without question, a Company’s ‘Management Credibility’ and ‘Effective Business Strategy’ are two of the most fundamental influences on all Investment Decisions, for both Buy-Side and Sell-Side.
Which leads to one obvious conclusion:
Listed Corporations must be much as obsessed with creating confidence in their Management Credibility and their Business Strategy as they are with delivering their Short-Term Numbers.
This raises some interesting questions for most CEOs:
- How much of your time do you spend building your own Management Credibility and shaping your own Personal Brand?
- How much of your time do you spend building and communicating your Business Strategy, as opposed to implementing it?
- How much of your attention in Analyst Meetings and Earnings Calls is devoted to the Numbers, as opposed to the most important Investment Drivers of all: Management Credibility and Effective Business Strategy?
Reputation is a Strategy Consulting Firm that provides personal counsel to Asia’s leading CEOs, advising them how to build and protect their company’s Market Value in the new world of business – and the new age of investing.