Leveraging Perception Studies to Stress-Test Your Capital Allocation Strategy

Understanding issuers’ capital allocation strategy is crucial for the investment community to understand a company’s ability to maximize shareholder value. Mergers and acquisitions (M&A), capital expenditures (also directed towards ESG), and research and development (R&D) are common sources of capital allocation.

While establishing a capital allocation strategy involves several key decision makers, including the board, IROs have a unique and important opportunity to actively engage the investment community through a Perception Study, where market intelligence can inform decision-making and ensure strategic alignment with shareholders- particularly when related to M&A. Companies integrate Perception Study findings into near and long-term strategic planning and board decisions.

 

Understanding the investment community mindset

A Perception Study enables an in-depth understanding of investor and analyst views on capital allocation relative to sustained shareholder value, as delving interviews result in unvarnished views and feedback. Specifically, a Study provides a deep understanding of critical areas including:

  • How well is the Company’s growth strategy understood?
  • How well are organic and inorganic growth opportunities- and potential red flags- perceived by the market?
  • How does the financial community perceive the Company’s financial performance?
  • How confident is the market in the Company’s ability to deliver sustained profits?
  • What are the investment community’s views on the Company’s past capital allocation decisions?
  • What are its views on the Company’s dividend policy and/or share buyback programs?
  • Does the market support the Company’s investment in R&D?
  • Related to M&A:
    • Would this surprise the market, and which aspects should be proactively addressed within the announcement?
    • How confident is the investment community in the company’s ability and agility to successfully integrate an acquired company?

 

Closing the circle to drive stakeholder engagement

A Perception Study after a transaction has been communicated can also enable the company can gain insights which inform future investment community communications. Seeking honest feedback and ensuring it is heard demonstrates the company’s commitment to proactive IR.

A Perception Study subsequent to implementing the capital allocation strategy could discuss:

  • Has the company provided the required level of disclosure to communicate the new strategy to the market?
  • How should capital allocation be balanced, going forward?
  • Related to an acquisition:
    • are there specific concerns related to the successful integration of the acquired company?
    • Does the market perceive the transaction as value-accretive?

 

A Perception Study therefore provides invaluable insights that can significantly enhance a company’s capital allocation strategy. Beyond understanding growth opportunities, financial stability, and market positioning, the Study reveals how well the company’s strategy and performance are perceived by key stakeholders. Incorporating related feedback ensures that capital allocation decisions are aligned with and informed by market expectations, fostering trust and transparency.

To further bolster this transparency, companies could include a note within their 20-F filings indicating that the Board received feedback related to investment community surveys. This not only sends the message that the Board is kept apprized of market feedback, but also underscores the company’s dedication to informed and strategic capital allocation.

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