What every CEO should understand about stock markets (and likely doesn’t)

Years ago, while overseeing the listed companies division as vice chairman of NASDAQ I ran the “Issuer Advisory Committee” – the committee representing the interests of issuers to the Exchange. It was chaired by Tom Stemberg, founder of Staples. We struggled (really struggled) to find CEOs and CFOs who understood markets sufficiently to weigh in cogently on how structural and regulatory changes might impact shareholders, share price and access to capital.

Today’s markets are dramatically more complex and less forgiving: High-frequency traders, dark pools, algorithmic trading, hedge funds, shorts, flash crashes, and corporate activists mold the landscape. Poor execution is costlier than ever. Yet managements and boards are much worse supported than twenty years ago.

Here are some big mistakes companies make and how to fix them:

1) Trusting Wall Street’s advice. The quip amongst my CEO friends is, “All investment banks are #1.” They care about one thing: Selling their platform (after all, it’s the only one they have to sell) and maximizing their economics. To make matters worse, most investment bankers are relationship officers who lack real expertise in equity capital markets (ECM). Even ECM professionals don’t understand the investor account base (they don’t speak to investors directly), while the client of the salesforce is the investor, not the company they are underwriting.

Solution: Hire independent experts. Find independent sources of data to guide decision making. Don’t rely solely on the advice of investment banks whose incentives and interests frequently run counter to yours.

2) Believing management (or board members) has adequate capital markets expertise. Today’s CFOs are hired for their disclosure abilities. Most are CPAs by training. Hardly any have a background in ECM.   Venture capitalists and private equity investors who serve themselves up as having this expertise are deceiving themselves. They may know more than management, but they don’t know anywhere near enough to keep management from stepping on unnecessary land mines.

Solution: Hire independent experts. Find independent sources of data to guide decision making. Don’t rely solely on the advice of investment banks whose incentives and interests frequently run counter to yours.

3) Believing Wall Street will support your stock in the aftermarket. Wall Street can’t make money supporting your stock. So they don’t. They’ll tell you they will, but they won’t, unless you ride roughshod over them. Bankers and ECM professionals paint the illusion of “support.” At most, firms may provide research. They don’t commit capital to support liquidity in your stock. They don’t make outbound phone calls to the right investors. They may set up meetings, but if you’re not careful most of these meetings will serve the interests of their big commission paying customers – not yours. Do the math: At 2 cents a share, even if they trade 100,000 shares a day in your stock, that’s only $2000. By contrast, the largest institutional investors will generate over $100 million a year each to the largest Wall Street firms.   If you were a salesman on Wall Street, where would you spend your time?

Solution: Companies need to invest heavily in internal and external investor relations and create a comprehensive plan to identify, target and support qualified long-term investors (most of which are not found through Wall Street).

4) Believing that investors want to hear your story. Just because your bankers set up a meeting with an investor doesn’t mean that investor has any interest in your story.   Even IBM’s IR department discovered they were getting thrown in front of the bus by Wall Street, so they took control of the agenda and had their owns experts tell research analysts which investors they wanted on the docket. In addition, if you can’t give investors a reason (we call it a “catalyst”) for why your stock isn’t going to be “dead money,” it’s better to keep your powder dry until you can articulate that reason and then be prepared to hit the road hard.

Solution: Invest in systematic account targeting and take control of the meeting schedule (or hire an independent expert to do so). Be in a position to vet meetings (both institution and individual) before you take them.

5) Woefully undermarketing your stock around key events.   Deals are marketing “catalysts” – a reason for investors to do their work and learn your story. If you’re relying on a traditional Wall Street distribution, then the calls will invariably be focused on larger commission paying investors. You’ll miss at least 80% of the long-term fundamental investor base and you could unwittingly put pressure on your share price.   You’ll also miss a grand opportunity to condition the market, get on “radar screens” and increase demand for your stock.

Solution: Develop a strategy and team to reach the broader market and do it every time you can.

We practice “Moneyball” for corporate clients. We use data science to support managements and boards. We represent corporations, not investors. We design plans to allow managements to reach many more of the right investors and to avoid wasting their time with the wrong investors. We help managements derive full value from their banking and other fees.

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About David Weild

David Weild is Chairman & CEO of IssuWorks and the former vice chairman of Nasdaq who is widely referred to as “Father of the JOBS Act” – pro-equity capital formation legislation signed into law in 2012. He also ran corporate finance, equity capital markets and strategic planning for investment banking, equity research, institutional sales and trading at a major Wall Street firm. He may be reached at david.weild@issuworks.com.

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