Strategy presentation’s effect on stock prices

New CEOs should communicate strategy earlier to market, research finds. The Governance Leadership Centre considers the implications of the findings for boards.

Cheap Talk? Strategy presentations as a form of chief executive officer impression management
Richard Whittington, Basak Yakis-Douglas and Kwangwon Ahn, Strategic Management Journal, November 2015

Communicating organisation strategy can be a deceptive challenge for CEOs and boards. Some CEOs excel at explaining short-term performance at the expense of long-term strategy. Others are reluctant to say too much about strategy for competitive reasons. Then there are CEOs who fumble strategy communication, destroy shareholder value, and create headaches for the board.

New research has found CEOs who present their strategy within the first 100 days of their appointment can see stock prices rise by an average 5.3 per cent. The average gain for presentations from new CEOs who join from another organisation, and are known in their industry, was 9.3 per cent. Presentations by new CEOs from outside the industry added 12.4 per cent to the stock price. Overall, CEOs added an average 1.6 per cent to the share price when presenting the organisation’s strategy to the market.

The research, accepted for publication in the Strategic Management Journal, analysed stock price responses (adjusting for marketing movements) to strategy presentations given by CEOs of NYSE or NASDAQ-listed companies between 2000 and 2010.

It was co-authored by Oxford University Professor Richard Whittington; Dr Basak Yakis-Douglas, Research Fellow at the Oxford Centre for Corporate Reputation at the Saïd Business School; and Assistant Professor Kwangwon Ahn, of the Peking University HSBC Business School.

Although gains from strategy presentations can be significant, only 40 per cent of new CEOs present their strategy within the first 200 days of their appointment. “We suggest that new CEOs pay more attention to this potential means of communicating, especially if they are unfamiliar to investors,” the authors said.

Implications for boards

Although the authors focused on CEOs, the findings have several implications for boards. First, when recruiting a CEO, boards could pay extra attention to the candidate’s ability to engage in corporate impression management via strategy presentations to investors. CEOs of smaller listed entities, in particular, spend considerable time promoting their company to the market in investor roadshows, analyst briefings and other communication events.

Second, the board should consider when a strategy devised by a new CEO will be ready to present to the market. Presenting a strategy within the CEO’s first 100 days of tenure can boost share-price performance because investors are hungry for information on the company’s new plans. Boards, and particularly the chairman, can play a valuable role in introducing new CEOs to the market.

Third, the board should consider how the executive team presents strategy in the context of the organisation’s investor relations program. Strategy can be difficult to communicate because institutional investors often have a short-term focus; management does not want to look too far ahead with strategy or set expectations too high; and continuous disclosure obligations add other challenges. Nonetheless, an ability to communicate strategy – not just the latest earnings result – adds value.

Finally, boards should consider their role in communicating strategy to the market. Chairmen of larger ASX-listed companies are spending an increasing amount of time communicating to key investors, such as superannuation funds, on governance and sustainability issues.

As their role in investor relations grows, boards might consider which aspects of strategy they should communicate and how, so as not to blur any boundaries with management.