As companies begin to emerge from the pandemic crisis and settle into a “new normal,” longer-term views of the disruptive landscape are increasingly taking center stage in investor thinking.
And while the current financing environment remains favorable, certain warning signs are emerging, including inflationary pressures, higher long-term interest rates, and worrying cases of over leverage, that suggest the current market may not remain as accommodating indefinitely.
Businesses forging their post-emergence strategies should move quickly to put their financial and operational houses in order, while proactively communicating their planned approach to address longer-term disruptive trends, ideally on investors’ own terms.
Last year, we introduced a framework for stakeholder management in a COVID-19 disrupted world, which is outlined in the graph below, and have published a series of articles related to the ongoing challenges of managing these stakeholders in the current environment. Because disruption can mean so many things—many of which are by their nature unpredictable—we regularly advise our clients to establish a comprehensive risk assessment framework for their specific situation, re-evaluate it on a continual basis, and take steps to ensure their organizations have the flexibility to pivot quickly in a continually changing world. In this fifth and final article in this series, we look at how this framework can be applied to your investors.
But how and what should companies be communicating with investors about disruption?
Since there is no single 'investor mindset,' investors don’t have a uniform framework for assessing the impact of disruption. Companies can take this as an opportunity to guide investor thinking by first taking the initiative to frame the discussion for investors, then by translating the impact of these initiatives into analytical metrics that reflect their perspective.
Examples of such metrics might include the following:
RETURN ON INVESTMENT FROM DISRUPTION INITIATIVES.
Investors routinely use Return on Invested Capital (ROIC) and related metrics to benchmark investment opportunities and performance. However, they may struggle to fit disruption topics into this framework. Take the example of a company coordinating its strategy across multiple parts of the organization, including new hires, sales & marketing programs, R&D, capex and other actions. These initiatives might impact different parts of a company’s financial statements, making it difficult for investors to isolate and measure them as a whole. In this instance, the company might consider calling out the aggregate amount invested across the entire program and how it will gauge return on that aggregate investment.
“VARIABLIZED” COSTS’ IMPACT ON OVERALL MARGINS.
Increasing the mix of variable costs in the total cost base improves companies’ ability to remain nimble in the face of changing competitive landscapes. These shifts, however, may not be obvious in financial disclosures. Additional guidance on how costs (and, therefore, margins) could flex up and down as the landscape changes enables investors to assess the company’s potential performance under multiple scenarios, fosters a better appreciation for the steps the company is taking to gain that kind of flexibility.
EMBEDDED OPTIONALITY FROM DISRUPTION INITIATIVES.
Operational improvements that increase response time, provide protections against supply-chain shocks, and bring other similar benefits can all help better position a company in a disruptive environment. They can also be viewed as embedded options that, for the “cost” of that option, either provide the company (and, by extension, its investors) improved access to upside opportunities, protect against downside risk, increased diversification, and bring other benefits. Many investors are familiar with sophisticated option-based analytical frameworks and are likely to value (quite literally) these embedded options when they are highlighted to them.
ACCOUNTABILITY METRICS AND ALIGNMENT OF INCENTIVES.
Investors will need a means of measuring progress, and it is in everyone’s interest to understand how success will be measured how that will influence executive compensation. By establishing and communicating KPIs, milestones and objectives, as well as an understanding of how these initiatives fit into the company’s overall strategic plan, companies can better ensure ongoing alignment with their investor base.
Finally, it is important to remember that there are many different types of investors, and their priorities and concerns may not be uniform: creditors might focus on liquidity, cash flow visibility, and downside protection; equity investors might emphasize cost and timeline to achieve growth targets. Even within these groups, interests are likely to diverge.
Since disruption implicates such a broad spectrum of business issues, all classes of investors will appreciate management teams’ efforts to better communicate the impact that their initiatives will have on their business.
Facing disruption requires decisive action and bold leadership. The time to engage with your investors on these topics is now.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of AlixPartners, LLP, its affiliates, or any of its or their respective other professionals or clients. This article regarding Managing investor expectations in a disrupted world (“Article”) was prepared by AlixPartners, LLP (“AlixPartners”) for general information and distribution on a strictly confidential and non-reliance basis. No one in possession of this Article may rely on any portion of this Article. This Article may be based, in whole or in part, on projections or forecasts of future events. A forecast, by its nature, is speculative and includes estimates and assumptions which may prove to be wrong. Actual results may, and frequently do, differ from those projected or forecast. The information in this Article reflects conditions and our views as of this date, all of which are subject to change. We undertake no obligation to update or provide any revisions to the Article. This article is the property of AlixPartners, and neither the article nor any of its contents may be copied, used, or distributed to any third party without the prior written consent of AlixPartners.