The Power of Narrative and CEO Role Models

The Power of the Proper Narrative

  • A narrative is (among other things) a logical and convincing story behind the firm’s activities – existing and proposed. Many investors in their investment decisions do it because this “feels right”, not because they can pinpoint the precise narratives justifying these decisions.

  • Asking a number of qualitative questions helps acknowledge the actual narrative and spot a narrative shift earlier than others do, before this is priced into the security by the market.

o   What narrative is getting priced into the stock? Is it the right one?

o   What kind of narrative (optimistic, realistic) is management pushing? Is it already priced in the stock?

o   What will be the impact of the narrative change?

o   How can one sell this narrative to their investors?

  • “Friendly activist” investors can work with the Board/management not only on the governance improvements, but also on changing/shaping the narrative for the market.

  • Good communication is not just a good thing to have to please paranoid investors, it’s a powerful tool to present the narrative to the market and unlock shareholder value.

  • (unrelated, but useful) Markets tend to be slow fully pricing in major capital allocation changes (good and bad), i.e. there’s a window of opportunity to make/quit and investment before others figure out what’s going on.

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Do you really want a CEO to be a role model?

  • What we’re led to believe: the people at the top must be role models for their employees.

  • However, deficiencies of character invariably get copied, too.

  • Also, copying just the observable behaviour of a boss leaves her internal motivations and deeply rooted beliefs hidden, so the value of imitating someone is limited if not outright negative [MK: lots of assholes I know tried copying Steve Jobs thus reinforcing their terrible behaviours].

  • The example above is of a role model; copying a reference individual includes the understanding of the behaviour.

  • Executives should be aware that their behaviours are copied, so they have a responsibility to at least disguise the unwanted behaviours.

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