Bridging the Gap: Why Understanding Investor Expectations Is So Critical and So Difficult
Rodolfo Araujo, CFA | May 6, 2025
In today’s capital markets, it’s not enough for management teams to simply articulate a compelling strategy. To sustain valuation, prevent activist pressure, and unlock long-term shareholder value, companies must deeply understand how investors perceive their strategy and what expectations drive their behavior.
As noted in a recent article, while topline growth and Return on Invested Capital (ROIC) remain the foundation of long-term Total Shareholder Return (TSR), these metrics alone do not tell the full story. Market perception plays a critical role in determining whether investors will support management’s plans or challenge them.
The High Stakes of Misalignment
When management and investors are aligned, companies are better positioned to earn premium valuations and avoid disruptive campaigns. But when that alignment breaks down—whether due to communication gaps, misread expectations, or skepticism around execution—investor support can erode quickly.
This misalignment can lead to a range of negative outcomes:
Declining valuation multiples
Higher cost of capital
Increased vulnerability to activist interventions
Investor opposition to transactions or strategic shifts
In short, when investors don’t believe in management’s ability to execute, the consequences go far beyond capital markets. They can derail strategic implementation altogether.
Why It’s So Difficult to Understand Investor Expectations
Despite its importance, few companies systematically gather and integrate insights into how investors truly view their strategy and leadership. In theory, many management teams believe they have a clear understanding of investor sentiment. In practice, however, perception gaps are often larger and more damaging than expected.
There are several reasons for this persistent disconnect:
Constraints on Investor Feedback: Most institutional investors are not incentivized to proactively share feedback, and in some cases may avoid doing so to prevent triggering regulatory scrutiny.
Siloed functions: Investor relations and corporate strategy often operate in parallel, rather than as a coordinated feedback loop. This disconnect makes it harder to surface and act on market intelligence.
Blind spots in perception: Management may be confident in the logic of their strategy, while failing to recognize how investors perceive execution risk or missed growth opportunities.
Lack of structured market insight: Without disciplined market research, management may rely too heavily on investor conferences, earnings calls, or analyst reports, missing more nuanced concerns that influence investor sentiment.
These challenges are compounded by a tendency to overestimate investor alignment. In a significant number of contested situations I’ve been involved with, management had little idea what investors were actually thinking. During my time at Institutional Shareholder Services (ISS), I frequently heard from management teams that they had spoken with more than 50% of their investor base and believed those investors supported them. Yet in separate conversations with those same investors, I often heard the opposite. This illustrates how surface-level engagement or confirmation bias can leave companies blind to growing frustration until it erupts into public opposition or activist pressure.
From Reactive to Proactive: Building an Investor-Aligned Strategy
Periodically running traditional investor perception studies is not enough to achieve meaningful alignment. Closing the gap requires shifting from reactive investor relations to proactive investor understanding. That means:
Conducting anonymized investor interviews to surface unfiltered views on the company’s strategy, leadership, and valuation drivers.
Benchmarking internal views against market perceptions, including insights from analysts, competitors, and former executives.
Testing key value-creation initiatives for how they will be perceived—especially when initiatives have a positive net present value but may initially trigger negative market reactions.
Refining the equity narrative to better reflect investor priorities, risk sensitivities, and performance expectations.
By embedding investor feedback into corporate strategy, companies can align messaging, prioritize high-impact initiatives, and secure long-term shareholder support.
Moving Forward with Confidence
Understanding investor expectations is not just a matter of better communication, it’s a strategic imperative. The ability to anticipate how investors will react to your strategy, governance decisions, or capital allocation plans is a core advantage in today’s market. It helps management teams stay ahead of activist scrutiny, maintain valuation stability, and drive value with confidence.