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Why we need more investor dedication

Date:25 March 2021
Professor Jana Oehmichen and associate professor Sebastian Firk
Professor Jana Oehmichen and associate professor Sebastian Firk

Some of the most unique firms such as Tesla and Facebook seem to be concerned about the influence of the capital market on their firms’ strategies. Some time ago, Tesla threatened to delist to pursue a more long-term oriented strategy without the short-term pressure of the capital market. Digital stars such as Facebook and Alphabet issue stocks with limited voting rights to avoid interference of shareholders with their strategic decisions. Since this trend can have severe consequences on the control function of the capital market, we want to offer an alternative – investor dedication!

What is the underlying issue? To succeed, firms need to make unique decisions. They succeed by being different (and better) than their competitors. Tesla, for instance, continually challenges the taken-for-granted knowledge about how to build cars. However, such unique strategies are more difficult to evaluate.

By nature, unique strategies cannot be compared to strategies of benchmark firms and hence cannot be assessed on that basis. In consequence, some CEOs shy away from implementing such strategies. These CEOs fear that the short-term oriented capital market does not fully understand the long-term benefits of unique strategies and, hence, punishes them by harming their careers.

In their joint research with researchers from the University of Goettingen, Oehmichen and Firk find that investors who are long-term-oriented, focused, and committed – so called dedicated investors – help resolve this issue (Oehmichen, Firk, Wolff, & Maybuechen, 2021).

So how can dedicated investors have this positive influence on firm strategy?

Oehmichen explains: “First of all, dedicated investors gather in-depth private information about their investments. They also devote effort to understanding firms’ strategies and they do not put short-term pressure on their firms like other capital market participants.

Ours study shows that the commitment and patience of dedicated investors indeed reduces CEOs’ career concerns about unique strategies and encourages CEOs to pursue more unique strategies.”

The research also reflects the high levels of responsibility that investors have on strategic decision-making.

“Investors should express their level of dedication, for example, in the form of stewardship policies and also “walk the talk” by devoting efforts to understanding firm strategies”, Firk recommends to investors and firms. “Moreover, firms should openly communicate with their dedicated investors, engage in interactions, and thoroughly prepare investor meetings.

Finally, firms and investors should rethink strategy communication and measures. Especially in times of the digital transformation, traditional measures such as quarterly sales figures do not offer an adequate picture of the success of a strategy anymore.”

For more information, please contact:

Jana Oehmichen -  j.d.r.oehmichen rug.nl

Sebastian Firk - s.firk rug.nl

 

Reference:

Oehmichen, J., Firk, S., Wolff, M., & Maybuechen, F. (2021). Standing out from the crowd: Institutional investors and strategy uniqueness. Strategic Management Journal, in press. https://doi.org/10.1002/smj.3269