Leadership in the Age of Investor CapitalismPublished: June 23, 1999 in Knowledge@Wharton
Michael Useem, director of the Center for Leadership and Change Management at Wharton, examines this phenomenon in a study titled "Corporate Leadership in a Globalizing Equity Market." His research shows that the concentration of stockholding in institutional hands has given institutional investors unprecedented influence over companies. To assure investor favor and assuage doubt, executives must be capable of delivering the strategy story of the company in a way that is both compelling and easily grasped. Company executives must deliver this strategy story across borders to money managers and analysts throughout the world.
The sheer number of analysts and money managers makes this task daunting. There are more than 9,000 money managers just in the U.S. These money managers rely on a small army of more than 5,500 equity analysts who are with some 2,200 institutional investors, as well as more than 2,400 equity analysts who work for 200 different stock brokerage firms. These people and organizations have come to define the world of American investor capitalism. While the numbers seem large, the community within which they work is small; they know one another and the company executives in whom their assets have been entrusted.
Useem notes that company managers, as a result, face several thousand identifiable money managers who look for company competitiveness and results and do not hesitate to clamor for change when firms fall short. While at first glance, it might appear that companies might not welcome the increasing pressure from the hordes of money managers, the improved access to financial markets and funding largely outweighs the impact of the pressure by fund managers. Indeed, both sides stand to gain from the growth of international ownership.
Diversification reduces investment risk, so it to the advantage of money managers to spread their risks as far as possible. Global diversification is advantageous for company executives as well. By bringing foreign buyers into a company’s stock, managers can enhance their firm’s market value. Similarly, when company managers list their firms abroad, they often enjoy a significant increase in market worth. As far as we have come, however, the globalization glass is barely half-full and even greater market interdependence can be expected in the future.
For corporate executives, then, access to the globalizing equity market can be enhanced by listing their own stocks abroad and reducing restrictions on investors at home. In taking steps to make their ownership more widely available - both through individual company actions and by joining other companies to promote domestic reforms - executives can boost their firms’ market value.
But there are risks to this approach: company managers are also helping to create a shareholder world that looks radically different from what their predecessors had seen just a decade earlier. Company leadership increasingly requires a capacity to understand and respond to the concerns of global money managers, who are far less tolerant of languishing results than their predecessors and far more capable of demanding stellar performance. Even as money managers are becoming more vigilant, securities markets are becoming more reform minded and governance and reporting standards are becoming more uniform, all of which puts even greater pressure on company management to produce results.
Company managers might be tempted to set up barriers against shareholder activism. This, Useem argues, would be short-sighted. An enduring and more productive response calls for greater focus on shareholder value, improved disclosure of information, and stronger governing boards. Preemptive leadership is what companies need; it is easier for companies to make changes before angry shareholders demand them. Executives have learned that it is imperative to meet with analysts regularly to discuss their strategy and vision for the company. Both sides have an opportunity to kick the tires, measure the other, and argue the future. When American chief executives present their strategies to groups of stock analysts, research confirms that institutional interest and stockholding goes up.
Just as the concentration of institutional shareholding has already led to a world of personalized relations between company managers and money managers within the U.S., the globalization of institutional investing is placing a premium on personalizing relations between executives and investors across national boundaries. Company managers would be wise to continue to create and build these relationships now. William Wilby, director of global equities at Oppenheimer Management in New York stresses, "The biggest single peril of foreign investing is the credibility and trust of management" and there are few better ways to appraise both than to meet the executives face to face.
The globalizing equity market calls for new leadership skills. These skills are neither natural nor widespread. To deliver the value expected demands a nuanced understanding of the models and minds of investors on Wall Street, the City of London and other world financial centers. In the eyes of international investors, several classic virtues of leadership should be much in evidence, including accuracy, credibility, and integrity.
Effective leadership with international investors also requires revamping the firm to collaborate better with investors. The firm should be structured in a way that highlights its units’ contributions to total shareholder return. International institutions tend to be less risk averse than company managers and domestic owners in many countries and as firms reach out for global holders, leadership also calls for increasing a company’s willingness to take strategic risks. The emergence of a global market is becoming a major source for global competitiveness. International investors are pressing companies to be as good as the best worldwide, and top managments of many are transforming themselves to become just that.