3 Questions Investors Ask When Evaluating a CEO
Market volatility is back. Company valuations are scrutinized. Today’s leaders must demonstrate that they can handle uncertainty and remain nimble in the face of one black swan after another.
When it comes to proving valuation, companies tend to focus on the hard things like revenue growth, market share, and profitability. While these are undoubtedly important, stakeholders also pay attention to intangibles.
A key intangible that often goes unnoticed is the CEO’s ability to talk to investors. Although companies understand how vital it is for the CEO to be a persuasive public speaker, they may not realize that a CEO’s communication style and presence can impact company value. ‘business. According to a 2020 study, companies led by a CEO who communicates effectively were more resilient to the early negative impacts on the share price of the Covid-19 pandemic.
But what do investors really want from CEOs? When we imagine the CEO who excels in public speaking, we imagine the charismatic and highly outgoing leader. And yet, in our conversations with investors and analysts, we hear again and again that charisma is not only insufficient, but can sometimes work against us. Why? Investors, by their nature, should be skeptical. Their job is to drill holes to make sure they are making wise investments. And when CEOs respond to skepticism with charisma, it can be seen as a red flag. That doesn’t mean charisma itself is bad, though. CEOs need to be experienced and confident speakers. Rather, it is the perception of authenticity, authority and credibility that determines the evaluation.
Based on our 20-plus years of working with executives and investors (several on file for this article), we’ve distilled the three fundamental questions investors consider when evaluating a CEO and a company’s valuation. .
1. Is the CEO confident, but not overconfident?
Authentic communication occurs at the intersection of trust and humility. Investors want to see that the CEO has confidence in the strength of the company, without being blind to any imperfections. We like to call this “reasoned trust”. An overly optimistic presentation risks losing credibility. As one investor put it, “Don’t be a LEGO Movie leader telling us ‘everything is awesome’.”
When executives feel too pressured to “win” a discussion with investors, it can lead to overpromising, posturing, and a canny attitude. This brings us to what we call the Top Gun problem: “Your ego is writing checks that your body (or in this case, your business) can’t cash.” Several years ago, we worked for a company with a CEO who couldn’t resist offering his own long-term growth estimates at investor meetings. His estimates were unrelated to the short-term financial outlook, and his exuberance quickly reduced investor confidence – and the company’s valuation. “If you walk into a room…and you smell arrogance in the room, that’s the biggest red flag,” says Harry Shapiro, head of Shapiro Capital Management.
Demonstrating reasoned confidence begins with the physical position and tone of the speaker. We advise CEOs to adopt an open and generous attitude (feet planted, arms above the waist, open and relaxed posture). It’s also helpful to pause deliberately to give the audience a moment to fully digest the message. Deliberate silence during a presentation, even a virtual one, draws people in and breaks up the monotony of noise reaching the audience.
Don’t be afraid to acknowledge difficult challenges. CEOs are sometimes hesitant to openly voice possible objections and obstacles because they don’t want investors to lose confidence. Ironically, investors gain confidence when they hear their doubts and questions voiced by the CEO. By articulating the elephant in the room, you acknowledge your investors’ perspective, making them feel understood and valued. It also allows you to share your organization’s approach to problem solving. During a recent roadshow, a CEO tried this strategy and boldly told her investors, “You probably think this idea hasn’t worked in the past. Why would it work now? The investors nodded in agreement. The CEO continued, “Yes, it won’t be easy. But let me tell you what we learned from the past and why this time is different. Because she honestly and directly expressed investors’ concerns about the company’s performance, investors were more open to hearing her ideas.
2. Is the CEO outspoken?
As one investor we work with explained, “I don’t want a CEO who gives some sort of political answer to a tough question. I want honesty. Don’t water it down and say, “Actually, it’s a good thing we’re laying off half of our workforce. A CEO must be able to communicate the truth clearly, even when it’s hard to hear.
A potential obstacle to outspokenness is overly polished presentation. It’s tempting to over-rehearse and polish investor presentations precisely because so much is at stake. Although solid preparation is essential, it is crucial not to lose the immediacy of the message and the ability to read the room. It’s not about “Practice makes perfect.” Perfection is boring. Instead, practice how to better connect with your audience and get your point across. One way to do this is to think about the meaning of your words each time you repeat. Keep your words simple, direct and jargon-free. And relentlessly prioritize the expectations and needs of your audience. Too often we see executive clients presenting what they want to say rather than what the audience needs to hear.
Being outspoken is also about authenticity. Rob Stallard, a partner at Vertical Research Partners, puts it this way: “The last thing investors want is a cookie-cutter CEO. They want a personality and someone who can do the job. We’ve found that looking at personality, humor and background goes a long way in establishing credibility. Investors want to invest in an organization they understand and trust. It starts with what they hear from the person at the top.
3. Does he know how to listen?
If there is one skill that demonstrates the presence of a leader, it is the ability to listen. One of the biggest red flags for an investor is a CEO who is so focused on his message that he can’t listen to outside perspectives.
Unfortunately, listening is one of the hardest skills to master when the stakes are high. When an investor asks a tough question, it’s tempting to jump straight to the answer. This may be a missed opportunity to gain credibility by demonstrating listening skills.
Before answering the questions, take a moment to think about the question – and the need that drives it. It helps to breathe before you speak – and to take a moment to clarify not just the technical question, but the meaning behind it. For example, a question about your research and development investment strategy might also ask whether an investor can trust you with their money. A question about capital allocation is often a deeper question: “Am I a priority?” In addition to giving technical answers, show that you hear what’s behind the question and answer it as well.
One way to make sure you prioritize listening is to hold a pre-pitch board meeting, where you bring in multiple outside perspectives to ask the CEO his toughest and trickiest questions. We want our leaders and clients to face the toughest questions for the first time in the room with us, not in front of an investor, client or camera. The CEO practices listening carefully to the question and its intent, focusing on facts not speculation, and responding in a way that connects with the audience. In short, the Kills Committee finds the glitches, risks, and bugs insiders miss.
There is no doubt that investors are a demanding public. We’ve found that the best investor presentations happen when CEOs focus less on impressing investors with their speaking skills — and more on communicating what their audience needs to know. Fortunately, the communication skills required to talk to investors – reasoned confidence, outspokenness and a masterful listening – are the same skills needed to run the business. A good leader already has these skills and uses them every day. An investor presentation is a perfect opportunity to show them in action.