Staying Ahead of Investor Pressure
Rodolfo Araujo, CFA | April 24, 2025
Advisors frequently urge corporate directors to proactively adopt an activist mindset to avoid becoming targets of shareholder activism. By addressing performance gaps and vulnerabilities before activist investors intervene, boards can better align their actions with shareholder expectations and maintain strategic control.
With so many financial performance indicators to consider, where should directors start? Two critical metrics—topline growth and Return on Invested Capital (ROIC)—stand out, as they are strongly correlated with outperformance in total shareholder return (TSR). While long-term TSR depends on consistent growth and robust ROIC, actively managing investor expectations in the short to medium term is equally important for sustaining confidence, preserving valuation, and preventing investor pressure.
Prioritizing Topline Growth and ROIC
Activist campaigns typically emerge when boards and management fail to deliver TSR that meets or exceeds investor expectations—often due to weak topline growth or inadequate ROIC. Investors view these two metrics as the cornerstones of "profitable growth," linking income expansion with capital efficiency.
Successful capital allocation—i.e., investments that consistently generate cash flows above the company’s cost of capital—is paramount. Investors ideally seek revenue growth at or above GDP and peer benchmarks, supported by healthy margins that produce returns exceeding capital costs. A track record of consistent performance fosters investor trust, while companies recovering from underperformance must clearly articulate their strategy to restore and sustain value creation.
Evaluating a company's growth and ROIC trajectory requires analyzing projected revenues from current investments, anticipated profit margins, asset turnover, and future capital needs. Directors must consistently monitor these indicators to preemptively identify and address performance gaps.
Understanding Investor Sentiment
While growth and ROIC drive TSR over the long run, investor sentiment plays an outsized role in valuations in the short term, introducing TSR volatility. Directors must understand how these perceptions form and evolve:
Strategic Competitive Positioning: Investors evaluate the durability of a company’s competitive advantages (moats) and their ability to support ongoing profitability and superior returns.
Management Credibility: Historical performance and transparency heavily influence investor confidence in future execution.
When confidence in management or competitive positioning deteriorates, investors quickly adjust expectations downward—eroding valuations and increasing the risk of activist engagement. Maintaining investor confidence demands consistent, credible communication.
Winning Investor Trust Through Narrative and Numbers
Directors are frequently reminded of the importance of crafting compelling equity narratives—stories that explain how strategic investments will translate into growth and profitability. For example, Tesla sustained elevated valuations despite periods of financial volatility, largely due to investor belief in management’s ability to deliver on its growth ambitions. As one automotive executive put it in 2017, Tesla benefited from an effectively “negative cost of capital,” a reflection of investor faith in its long-term vision.
But compelling narratives are not enough—they must be backed by financial results. Investors fundamentally rely on numbers. Companies like Tesla, Netflix, and Amazon, which initially posted negative cash flows, retained support by demonstrating measurable progress toward long-term financial goals.
When the Story Breaks from the Numbers
When narrative and financial results diverge, investor confidence evaporates. Weak TSR and discounted valuations often follow. During my tenure at ISS, I observed multiple companies become activism targets after pursuing transactions perceived as value-destructive due to financial indicators contradicting management's narrative. In one case, management claimed an acquisition would enhance pricing power; investors rejected that rationale when subsequent results revealed margin erosion, despite management stating that this was an unrelated issue.
Investors read the numbers. The financial story matters more than persuasive language in press releases or investor decks. Directors must ensure that strategic narratives align with financial performance and transparently address discrepancies when they don’t.
Practical Steps for Directors
To proactively manage growth, ROIC, and investor expectations, directors should adopt the following practices:
Regular Internal Reviews: Evaluate company strategy and performance from an activist’s perspective. Use dashboards to track topline growth, ROIC, and related metrics relative to peers.
Structured Investor Feedback: Establish consistent feedback loops with investors to understand evolving expectations and why some may be avoiding the stock.
Investor-Informed Strategic Decisions: Incorporate investor input into key decisions. For example, if cost control is a recurring theme, consider launching a margin expansion initiative before announcing a major transaction.
Clear, Transparent Communication: Ensure that the equity narrative aligns with actual performance. When gaps emerge, communicate them clearly alongside corrective actions.
Defense Through Preparedness
Adopting an internal activist mindset helps directors stay ahead of external activist pressure. By focusing on topline growth and ROIC, aligning strategy with investor expectations, and communicating transparently, boards can build credibility, maintain strategic coherence, and enhance long-term shareholder value.