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CHAPTERONPERCEPTIONWORKFROM: CRISISOFCHARACTERBuildingCorporateReputationintheAgeof Skepticism.

by

PeterFirestein
OriginatorofTheOpenPerceptionStudy
2009byPeterFirestein PublishedbySterlingPublishingCo.,Inc. NewYork (Pages151163)
2126080877 peter@firesteinco.com

Chapter7

Strategy2:SeeYourselfthroughStakeholdersEyes
MarketIntelligenceandtheArtofthePerceptionStudy
Weliveinaworldofwildlydiversestakeholderinterests.Anycompanylackinga thoroughunderstandingofitsvariousaudiencestheirprejudices,perceptions,and attitudesnavigatesindarkness.Beforeyoucanhopetoconvincetheworldofyour merit,andinvestorsofyourvalue,youmustfirstknowhowtheythink.Without suchmarketintelligence,allcommunicationsareguesswork. Astrongreputationamonginvestorsandanalystsrequiressystematiclistening thatallowsmanagerstobecomepersonallysensitizedtotheirthinking.Such listeningoffersmanagementapotentinfluenceovertheinvestmentconversation aboutthecompany.Ithelpsprotectthecompanyfromitsownexcessivetendencies bymaintainingacontinuousoutsidereferencebywhichmanagementcanjudgeits
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actions.Ithelpsthecompanyidentifythoseactionsthatwillmakefriendsof enemiesandbuycriticaltimeandsupportwhenfuturecrisesoccur.

TheValueParadox
Acompanysmostimportantexternalconstituencyisitsinvestors.Thegulfthatlies betweenmanycompaniesandtheirinvestorscanbesummedupinwhatIcallthe valueparadox.Thistermdescribesthedynamicbywhichmanagementbuildsits companyaccordingtospecificideasofvaluethatrelatetoproduction,innovation, operations,logistics,andsoon.Yetitsultimategoalistocreatesharevalue,whichis assignedbythemarketaccordingtomodelsthatmaybearlittleresemblanceto managementsownideaofvaluecreation.So,althoughacorporateleaderworks everydaytobuildamorevaluablecompany,thecompanysmarketvalueis determinedlargelybyoutsidersoperatingaccordingtotheirownindependent principles.Managementsfailuretoreconcilethetwomeansthatmuchofthevalue thecompanyhasbuiltgoesunrecognizedandunrewarded. Thecompanysabilitytoencompassbothitsowninternaltheoryofvalueand themarketsisessentialtoachievementofahighershareprice.Muchofthiseffort boilsdowntoinvestorcommunications.Isthecompanydisclosingtheinformation investorsneedinordertovalueitsshares?Ismanagementaccessibleand responsive?Thecompanymustlearntocommunicateonthebasisofwhatthe marketwantstoknowratherthantheinternalstorywithwhichmanagementmay havefalleninlove.

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Sobeforeyoucommunicate,youmustknowyourinvestorsvaluation methodologiesaswellastheiropinionsofmanagement,itsstrategy,itscompetence toexecutethatstrategy,itsleveloftransparency,andhowitcomparestothe cmpetition.Thegoodnewsisthatallofthesethingsareknowable.Andthe mechanismbywhichtheycanbecomeknownistheperceptionstudy.

ThePerceptionStudyandItsVariations
Theperceptionstudyinvolvesaconsultantwho,onbehalfofthecompany, interviewsinfluentialinvestorsandotherstakeholders,thenreportstheiropinions backtomanagement.Atrustedthirdpartyinterviewercanguaranteeanonymityto respondentsandthereforeenhancethecandoroftheircommentary. Whileheavilyusedininvestorrelations,theperceptionstudyisadaptabletoa companysentirerangeofstakeholders.Whenappliedtothenonfinancialarena,it canuncoveropinionsofthecompanysstandingincivilsocietyanassetof growingimportanceintheageoftheInternetanduniversalscrutiny.Theexpansion ofperceptionworkintothesocialarenacreatesanopportunityforcorporate leaderstoengageNGOsthatarefocusedonenvironmentalandlaborissues,for example,wellinadvanceoftheemergenceofanypublicoppositiontothecompany. Suchengagementdevelopsinformationandidentifiestheexternalconversations that,ifpursued,willpromotethesmoothrunningofthecompanyinitssocial environment. Perceptionstudymethodologiesfallintotwocategories:quantitativeand qualitative.
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QuantitativePerceptionStudies
Withtheincreasingattentionpaidtoissuesofcorporatereputation,new approacheshavebeendevelopedtohelpcompaniesunderstandhowtoimprove theirimages.Thesemethodologiesleveragetechnologytoanalyzethebeliefs consumersandotherstakeholdersharboraboutacompanyindozensofdifferent dimensions.Theymeasurecustomeropinionofbrandsandlevelsofworker satisfaction.Theydissectnewspaperandmagazinearticlesbythethousands. Determiningnumericalvaluesineachoftheseareasshouldenableacompanyto identifymanyofitsobjectivedeficits.Ifyougetalowscoreonemployee satisfaction,forexample,youknowtoinvestthere. Quantitativestudieshavetheirrootsinconsumerresearch.Dozensof respondentsareaskednarrowlyfocusedquestionstowhichtheycangiveyesorno answers,oranswersthatreflecttherespondentsrelativejudgmentinvalues typicallyrangingfrom1to5.Datagatheredbyaggregatinglargenumbersof quantitativeinterviewslendsitselfeasilytochartsandgraphsandplayswelltoa PowerPointculture.Managementmaylearn,forexample,therelativepercentages ofinvestorswhodoanddonotthinkitsfinancialdisclosureisadequate.Itmayfind outthatperformanceoftheinvestorrelationsdirectorhasgonefroma3lastyearto a4thisyear.Likevirtuallyallinformation,thisisuseful.Butitcanhardlydeliverthe nuancetotellmanagementhowinvestorsvalueitsshares.

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QualitativePerceptionStudies
Qualitativestudiesalsoinvolveaninterviewerwhoasksquestions,buttheanswers arerecordedintheformofcommentary.Theseresultsaremoretexturedandhave theadvantageofcommunicatingnuance.Qualitativeresponsescanbeidiosyncratic, subjective,andhighlyopinionated.Inotherwords,theyhavethepossibilityof renderingaroundedandcomprehensivepictureofinvestorsviewsaboutthe company. Thequalitativeperceptionstudyislimitedonlybythefinitenatureofthe questionnaire.Thisisnominorlimitation,however,becausethevalueoftheresult derivesdirectlyfromthequestionsasked.Sothesourceofthequestionsisa determiningfactorinthequalityoftheintelligencethestudyultimatelydelivers.If yourquestionsarepromptedbyyourpriorconversationswiththemarketthelast conferencecallorroadshow,forexampleyou'llfindthattheanswerstothose questionsarepredictable.Oftencompaniesbelievetheirabilitytopredictthe answerstheygetfromaperceptionstudyprovestheyhaveasoundgraspofthe marketsthinking.Wegotconfirmationofwhatwealreadyknew,theyoftensay. Delusionalmaybetoostrongaword,butsuchaninterpretationoftenrepresentsa falsesenseofsecurity.Thisillusionofpredictabilityarisesnotfromasoundgraspof investorsentiment,butfromthefactthatanswerstheygettospecificquestions matchthepriorconversationsthatputthequestionontheiragendainthefirst place.Theresultsoftheperceptionstudy,inotherwords,arelimitedbythe questionsthecompanyknowstoask.

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TheOpenPerceptionStudy
Thecriticalinsightneededtogeneratethemostvaluableresultsfromany perceptionstudyisthatthoseresultsarelimitedbythequestionsthecompanyand theconsultantknowtoask.Astudyrestrictedbyasetofquestionsanysetof questionsthereforefailstodojusticetothedepth,variety,andintelligenceof institutionalopiniononanysignificantcompany.Thechallengeistobreaktheself reinforcingcycleandfindoutwhatinvestorsarethinkingregardlessofthe questionsthecompanyhasthoughttoaskthem.Managementcanaccessthisdepth ofintelligencethroughopenended,curiousdiscussionswithinvestorsconducted byaqualifiedthirdparty.Suchconversations,carriedoutthroughamethodology IvedevelopedandnamedtheOpenPerceptionStudy,revealnotonlywhat investorsthink,butwhytheythinkit.Whileaquestionnairecanbeusefulin launchingsuchaconversation,onlyintelligencederivedfromdiscussionsthatgo beyondthequestionnairegivesmanagementaccesstoinvestorsentimentthatis freeofitsownprejudgments.Suchanopenendedconversationdeliversthemost valuablekindofintelligencethereisanswerstoquestionsthecompanydidnt knowtoask.Suchintelligenceispredictiveandprovidesavaluableindicatorofthe issuesthatwillariseamonginvestorsinthefuture.

NarrativebasedResearch
TheeffectivenessoftheOpenPerceptionStudyderivesfromamethodologycalled narrativebasedresearch.Unlikeaquantitativeperceptionstudy,littleifanyofthe openformcommentarycanberepresentedinabarchart.AnOpenPerception
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Studywillnevertellmanagement,forexample,that43percentofthecompany's growthorientedinvestorsthinkitshoulddivestacertaindivision.Whatitmaytell management,however,iswhatinvestorsthinkofthatdivision,howitfits(or doesn'tfit)theoverallbusiness,andwhetheritsupportsthecompanysgreatest businesspotential.Moreover,thecompanywillreceiveawealthofvaryingideason thisdivisionratherthanareductionofallresponsestoasinglepoint.Suchmarket intelligencegenerallymakeslifemorecomplexformanagement,notsimpler,but complexityisthecommodityyoubuywhenyoudecidetorunalargebusiness.The benefityoureceivefromnarrativebasedresearchissimplythebestideasthatthose whoarecommittedtothecompany,andwhounderstandit,arethinkingatagiven time.Thosearepreciselythepeoplewhodecidethevalueofthecompanythrough theirdecisionstobuyandsellitsshares. Suchopennarrativewithinvestorsoffersanextrabonus:emotion.Neitherthe companynortheperceptionstudypractitionershouldeverforgetthatinvestors considerthemselvesdependentonthecredibilityofthecompanyfortheir livelihoods.Everyportfoliomanagerhashisownmanagementandhisown investorslookingoverhisshoulder.Heknowsthatatsomepointtheyllrequirehim tojustifyhisinvestmentdecisions.Soitshardlyaninfrequentoccurrenceinthe practiceoftheperceptionstudytohearcommentsmadewithemphasisand, certainlyattimes,withemotion.Inreferringtooneofmyclients,whommany consideredtobeonaprofligateacquisitionbinge,aportfoliomanageroncetoldme: ImnolongergoingtosupporthisNapoleoniccomplex.Combinedwithother commentsthataroseduringthesameinquiry,thisgavemetheconvictiontoadvise
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theclientunequivocallythathisexplanationoftheeconomicbenefitsofacquisitions hadtobecomemuchclearerandmorecomplete.Thecompanyspresentationsto investorsunderwentsomethingofatransformationafterthat,andlifewithits investorseventuallysailedintocalmerwaters.

DemanddrivenCommunications
Indiscussingthevalueparadoxabove,Idescribedthechasmbetweenideasofvalue creationheldbymanagementandthoseheldbyinvestors.Aparalleldistinctioncan bemadewithregardtothecompanysmarketcommunications.Doesmanagement frameitsconversationwiththemarketintermsthatinterestinvestors?Orhasit fallenintothehabitofdeliveringitsstorythewayitsexecutiveshavegrown accustomedtotellingittoeachother?Positivechangeininvestorattitudes,and thereforeinshareprice,canbestbeachievedwhenmanagementspeaksits investorslanguage.Thatbecomesdemanddrivencommunications,anditsvery differentfromthealltoocustomarycommunicationsmodelinwhichmanagement attemptstomoldmarketopinionbyspoonfeedingitinformation. Intelligencedevelopedthroughanopenmethodologyenablesacompanyto practicedemanddrivencommunications.Thefollowingexamplessuggestsome typesofthemesonwhichsuchacompanycanaddressthemarket: Doinvestorsbelievewevedonewhatwesaidwewoulddo?Any discrepancyherepresentsacredibilityproblem.Whatgapsdowehave toclose? Doweandourinvestorsinterpretourresultsthesameway?Ifwe're succeedinginincreasingmargins,forexample,dotheyseeittheway wedoasproofofimprovingperformanceorasunderinvestmentin thebusinessthatwillcomebacktohauntus?
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Dotheythinkweredisclosingallweshould?Ordotheythinkwe're withholdingasmuchaswecangetawaywith,perhapswhileclaiming tobeprotectingcompetitiveintelligence? Arewemeetingcompetitorstechnologychallengesbetterthan investorsthinkweare?Wouldaddingclarityonthispointstrengthen theargumentforbuyingourshares? Haveweproventheinvestmentcasefortheacquisitionswevemade?If not,whatbackingandfillingmustwedotoremoveinvestorspossible doubtsaboutourdisciplineandstrategy? Havewetakenfulladvantageofourcredibilitywithinvestors?Ifour perspectiveonourmarketwillenablethemtomakebetterdecisions, shouldwenotletthembenefitfromourcloseupview?

EducatingManagementInstincts
Thekindofintelligencemanagementderivesfromanswerstotheabovequestions deliversmorethaninformation.Thenuancedcommentaryitcarriescanplaya fundamentalroleindevelopingmanagementssensitivitytothesubtletiesofmarket thinkingaboutthecompany.Thiseducationofmanagementinstinctgoesfar beyondthenecessitiesofcommunication.Ithelpscorporateleadershipmake informedjudgmentsandanticipatecriticalissues.Ifbuildingshareholdervalue constitutesthecompanysprimaryoperatingprinciple,andifvaluedependson marketperceptions,thenintelligenceaboutthoseperceptionsiscentraltoenabling managementtodesignstrategiesfordesiredoutcomes.

M&A:HowtoGettheAnswerWithoutAskingtheQuestion
Managementinstinct,informedbythepredictivevalueofanOpenPerceptionStudy, placesthecompanyinpositiontoforecasthowthemarketwillreacttofuture eventsithasntevenannouncedyet.Byindicatingthemarketsprobableresponse, suchintelligencecaninformmanagementsthinkingaboutmanykindsofstrategy.
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Oneareawheremanagementinstinctcanmakeorbreakacompanyliesin decisionsregardingmergersandacquisitions.Inaworldwherecompaniesareoften rewardedonlyforgrowth,buyingitintheformofanestablishedenterprisemay seemthequickestandeasiestwaytopleaseinvestors.Acquisitions,however,are generallysohardtoprice,sodifficulttointegrateintotheexistingcompany,andso generallyunpredictablethatinvestorsresponsetothemisoftentosellthestock whiletheywaittoseewhathappens. Theresagreatdealonthelinewhenacompanyisconsideringanacquisition, butthelastthingintheworldmanagementcandoisaskinvestorswhattheythink aboutit.Competitorswouldbealloverthetargetcompany,itspricewouldrise,and theacquiringcompanysowninvestorswouldkillthedealbytalkingittodeath. Therearetwodifferentapproachestoresolvingthischallenge,andtheycanbe usedintandem.Bothleveragetheopenmethodologyscapacitytogetanswersto questionswithouteveraskingthem. First,acompanywiththehelpofasophisticatedmarketintelligence practitionercanstructureaconversationwithinvestorsthatidentifiestheir attitudestowardtheattributesofatransactionwithoutevermentioningthedeal itself.Letssaythecontemplatedacquisitionwouldaddassetsalongacertain productline.Generalquestionsaboutthatpartofthebusinesswouldreveal investorsopinionsaboutstrengths,weaknesses,andpossiblemarketopportunities. Iftheinterviewerweretopursuethesubjectbyaskinghowtheinvestorthinks managementshouldaddressitschallengesinthisarea(ashewouldhavedonefor otherpartsofthebusiness,aswell),theanswermightinvolvedevelopingstrength
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incertainmarketsandreducingcommitmenttoothers.Thismightwellindicate howtheinvestorwouldviewtheacquisitionunderconsideration.Theresalsomore thanasmallchancetheinvestorwillsuggestanacquisitionstrategyoutright, perhapsevenmentioningatarget.Theinterviewerwouldthencapturethis intelligencewithouteverhavingraisedthesubject. Asecondlineofquestioningthatsparticularlyfruitfulinuncoveringinvestor attitudestowardspecificpotentialacquisitionsinvolvesprobingthesubjectofcash allocation.Ifyouaskaseriesofinvestorsanopenendedquestionaboutwhatthey thinkofacompanyscashallocationstrategy,youreboundtoreceivearich spectrumofanswers.Respondentswillsuggestthatthecompanybuybackitsstock, orraisethedividend,orissueaspecialdividend.Theymaysaythecompanyshould investinorganicgrowth,targetingspecificbusinesslines.Ortheymayraisethe issueofacquisitions.Becausethesubjectofacquisitionsisintroducedbythe respondent,itopensthedoorforalineofquestioningbytheinterviewerthatis potentiallyrevealingofattitudestowardacquisitionswithoutgivinganythingaway. Infact,theinterviewerneednotknowanythingaboutacquisitionoptionsthe companymaybeconsideringinordertodelivervaluableintelligenceoninvestor attitudesonthesubject.

ThePerceptionStudyinRealLife
Everysubstantialpubliclytradedcompanyisthefocusofconcentratedinvestor analysisandjudgment.Theinvestmentcommunityispopulatedbysomeofthe worldsmoreintelligentpeople,andeachofthemispaidtobesharperandmore
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observantthantheothers.Capitalflowsintoandoutofstocksareswiftandmassive, which,forcorporations,meanstheirfundamentalvaluecanvarydramaticallywith investorsperceptionsoftheirresultsandthecontoursoftheirbusinesses. Everycompanyisunique,andperceptionstudies,evenwhenconductedforthe samecompanyayearapart,presentdistinctive,compellingstories.Thefollowing briefsketchesofafewstudiesindicatethevariety,andperhapsabitofthedrama, involvedinmanagementseffortstoruntheircompaniesandtelltheirstoriesina landscapethatneverstopschanging: Acompanywithaworldfamousbrandfeelsimprisonedbecauseits customersandthereforeitsinvestorsholdsuchloyaltyforthe brandthatthecompanycantdiversifyforgrowthwithoutalienatingits base.Conductingaperceptionstudyidentifiestheflexibilitythatexists withinthebrand,indicatingtheareaswherediversificationmaybe accepted,andwhereitwont. Anindustrialcompanyistheundisputedtechnologyleaderamongits peers.Itsknownforhiringthebestandthebrightestengineers,andits sharestradeatasignificantpremiumtoitscompetitors.Itfacesthe challengeofinducinginvestorstocontinuetopaythepremium,orto increaseit,atatimewhenitstechnologyisreachingadegreeof complexitythatfewfinancialplayerscanassess.Aperceptionstudy tellsthiscompanythatflauntingthesophisticationofitstechnology willdolittletoincreaseitssharepriceunlessitshowsinvestorsthe addedvalueeachmajorpieceofthattechnologybringstoitscustomers andhowitcomparestocompetitorswhoareworkingfeverishlyto closethegap. Ahighlyesteemedinvestmentbankencounterspressureonitsmarket sharebecausecompetitorsaregrowingthroughacquisitions.Itsown acquisitionrecordisntgood,andmanagementissearchingfora strategicwayforward.Aperceptionstudytellsthisbankthatinvestors valueitforitswealthmanagementandfixedincomeorigination businesses,andmorethanafewwillsellitssharesifitstartsbuying otherbanks.Theydontbelieveithastheexpertisetoacquireorprice well.Andtheydontthinkithastheabilitytointegrateoperations.They believeinitsabilitytogrowitsbusinessesorganically,andtheyvalueit becauseitsbeensofarmistakefree.
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Aspectacularlysuccessfulglobalconglomeratethathasgrownthrough whatappearstobeanindiscriminatebuyingspreehasalienatedits investorsbyfailingtosticktoanannounceddisciplineofaddingassets onlyinunderrepresentedgeographiesanddisciplines.Aperception studyshowsthatinvestorsstillseeitsCEOasbuyingeverythingthat comesupforsale,andtheyrestartingtorebel.Inresponse,the companyremakesitsdisclosurestrategyandbeginstooffer significantlygreaterdetailontheeconomicunderpinningsofeach acquisitionitmakes.

ThePerceptionStudyasCommunication
Companiesoftenfindthattheactofconductingaperceptionstudycreates,initself, anewkindofengagementwithinvestorsandotherinfluencers.Throughhundreds ofperceptionstudyinterviewsconductedforcorporateclients,Iveoftenreceived suchcommentsaboutthecompanyas,"I'vebeenwaitingforthemtomakethiscall forfiveyears."Inadditiontothemarketintelligenceaperceptionstudyoffers,the companyssimpledemonstrationofinterestininvestorsopinionscanchange attitudestowarditstransparencyanditscapacitytoadapt. Theoverridingmessagethatperceptionstudiesdelivertocompany managementsisthattheelementsofinvestorpsychologyareknowable.The dissonancethatmanagementsexperienceintheirrelationshipswithinvestorsis generallyrootedininvestormistrustofmanagementintentions.Yetinvestorsare alwayslookingforreasonstobuy,andarobustperceptionstudyislikelytoshow managementthespecificpathtobuildingtrustintermsbothofcommunication andoperationofthebusiness. Onewouldassume,then,thattheresstronginterestinmarketintelligence amongcompaniesthatareundervaluedandtrailingintheirindustries.Butasa

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consultantworkinginthisfieldovermanyyears,Ivefoundthatthosecompanies aregenerallynottheoneswhoarecuriousaboutwhattheirinvestorsthink. Companiesthatmandateindepthperceptionworkgenerallyturnouttobeindustry leaders.Gettingindepthmarketintelligenceisjustoneofthehundredsofthings theynaturallydotostayontop.Theyseemtounderstandintuitivelythatifyou wanttoknowwhatthemarketthinks,youhavetoask. PeterFirestein GlobalStrategicCommunications,Inc. NewYork 2126080877 peter@firesteinco.com www.firesteinco.com

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