How to Build — and Maintain — Relationships with Your Shareholders

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By Sohaib

HANNAH BATES: Welcome to HBR On Strategy, case studies and conversations with the world’s top business and management experts, hand-selected to help you unlock new ways of doing business. Does your company have a strategy for working with Wall Street?  Whether your company is big or small, IBM’s former CEO Sam Palmisano says it’s essential to build relationships with your shareholders before there’s a specific problem to address. In this episode you’ll learn how to communicate with your investors to meet their needs without changing your strategy. For instance, when Palmisano was leading IBM, he offered investors detailed multi-year projections of revenue growth, rather than quarterly outlooks because he wanted to keep the company’s focus on the longer term. You’ll also learn how Palmisano carefully considered his role as CEO in meetings with investors in order to send the right messages to IBM shareholders and his employees. This episode originally aired on HBR IdeaCast in May 2014.  And just a note — we recorded this by phone. While the audio quality is not  great, the conversation is. I think you’ll enjoy it. Here it is.

JUSTIN FOX: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Justin Fox, and I’m talking today with Sam Palmisano, the former CEO of IBM. I did an interview with Sam for the June issue of HBR, titled “Managing Investors.” He also has a new book out, Re-think: A Path to the Future. Sam, welcome to IdeaCast.

SAM PALMISANO: Justin, thank you for having me.

JUSTIN FOX: Sam, I came to your office a couple months ago to interview for our magazine about the challenges, as a CEO, of dealing with Wall Street. And I kind of expected you to gripe a lot. But you didn’t. Why not?

SAM PALMISANO: Well, I think, quite honestly, Justin, maybe in my early years as a CEO, I would have been complaining. But I kind of came to the conclusion over time that fundamentally, Wall Street and the investor are your owners. And you need to come up with a strategy to work, as best you can, with the investment community.

JUSTIN FOX: And early on, as CEO, was that a problem?

SAM PALMISANO: Well, I think quite honestly, as I learned, it was an IBM problem, not necessarily Wall Street’s problem. We were too confusing– to them. And so therefore, we found we needed to give them something that worked for us and our management system and our strategy, but also was simpler and clearer so they could decide what investments they would like to make.

JUSTIN FOX: So, what did you give them?

SAM PALMISANO: Well, fundamentally, I was opposed to doing short-term outlooks– quarterly forecast down to $100 million of revenue or a penny a share, et cetera, et cetera. I was against that, primarily because I felt that it sent the wrong signal to the company and to the people in the company relative to what we needed to work on for the long term. So, we came up with a model that was multi-year. We rolled it out in 2006 with a target of 2010. But we gave them specifics, so they could see how much was going to be revenue growth, how much would be acquisitions, productivity, how much would be share buyback, et cetera. So they could look at the model, and we were at $6 at that point in time. We said we would take it to $10 by 2010. And we overachieved and did that by 2009.

JUSTIN FOX: That’s earnings per share, right?

SAM PALMISANO: It’s– I’m sorry. Earnings per share, correct. Exactly. But it was something that was long enough for us– four years was a reasonable time frame for what we needed to do– and also, was clear enough for the investor to decide whether they would participate in the company or not, or just go invest elsewhere.

JUSTIN FOX: And you started doing regular meetings with your biggest investors, right?

SAM PALMISANO: Yes, we did, Justin. That’s Correct. What we decided to do– we had a long discussion internally. Once we get comfortable with this roadmap, we had a long discussion. And it went along the lines, well, if we had an activist involved, what would we do. And I said, well, we of course would meet with the activists and go through our strategies and solicit their input. So, I persuaded with my team that If we would do that for an activist, why shouldn’t we do that for our larger shareholder? So, we kicked off meetings with the large shareholders, and some of the mid-tier shareholders. But we have a couple of those at one time. We tried to do that in the middle of a quarter, when we weren’t in a period of– quiet period, around earnings and those sorts of things.

JUSTIN FOX: And your biggest shareholders are mutual fund companies– people like that?

SAM PALMISANO: Berkshire Hathaway is the largest. Cap World and other funds probably are number two today– although I’m out of date. I’ve been retired for a couple years. But you’d have Fidelity. You’d have Wellington. You’d have T. Rowe Price. A lot of the large institutional investors were the biggest shareholders of IBM.

JUSTIN FOX: And Berkshire came in right at the end of your tenure, right?

SAM PALMISANO: That’s correct– my last year.

JUSTIN FOX: And that was, to some extent, a reward for your whole plan having worked out pretty well.

SAM PALMISANO: Now, Ginni’s spent a lot of time speaking with Warren after he went public on the investment. So, I spoke with him briefly, but she was the new CEO. We all agreed that she should go make the introductions, spend more time with him than me, since I was leaving. But the point was that he understood– I mean, he never invested in tech, historically. But he understood the model. He understood the balance sheet. He understood cash flows. He viewed us as a very shareholder friendly company. And that’s why he made an investment in a tech company, which heretofore, Warren never did. And he stated publicly, he didn’t understand technology. And that’s why he didn’t invest in it.

JUSTIN FOX: When you think about the regular relationship between CEOs and CFOs and Wall Street, the thing that comes up is those conference calls, quarterly conference calls the companies do. IBM does those conference calls, right?

SAM PALMISANO: I mean, we sort of have to, right? You announce earnings, you have to have a call. And it’s mostly the sell side on the call. But the investor and the buy side do listen in.

JUSTIN FOX: But are you ever on those calls?

SAM PALMISANO: No, I never did those, my entire time as a CEO.

JUSTIN FOX: And was that matter of principle, or?

SAM PALMISANO: Well, it was back to– we had a large shareholder meeting in the spring, which I believe IBM still does. And it’d be well-attended from both the buy side and the sell side. And the most of the questions, at least in the large audience, would come from the sell side, similar to a quarterly call. I just felt that, it was the– again, back to the tone, it would set internally within the organization, And? If I was going to spend the time on that call, it would set the impression that the most important thing we were doing in the company was a quarterly outlook, which I mean, clearly, we perform. So the stock– I think I started, it was the 80’s and I left when it was around 200. So you take that plus share buyback and dividend, we created over $140 billion of shareholder value. So there were lots of ways to create shareholder value other than doing quarterly conference calls as you announce earnings.

JUSTIN FOX: You had one thing going for you on that decision, which is that your predecessor, Lou Gerstner, didn’t do those calls either, right?

SAM PALMISANO: Yeah, that’s a good point, Justin. I never faced a situation where Lou did it. So I wasn’t under the gun, or I wasn’t breaking the pattern. I think it’s harder if you take over as a new CEO, and your predecessor did the quarterly call, it’s much more difficult to stop, because you signal something. It’s probably never which you intended, but it’s not a positive signal to the investor if you stop doing the call if your processor had done them.

JUSTIN FOX: Because it is amazingly to me, just how many CEOs do those calls. But to move on, your approach– this model and the way you communicated with investors– is this something that you think can work for any company? Or was there something particular about IBM that made that appropriate?

SAM PALMISANO: You know, we were one of the first– I think, we were the first to do it. We couldn’t find anybody else was doing it at the time, anyway– or at least a large cap company. We couldn’t find anybody had taken that approach. So we kind of came up with our own model. I believe it can be done. You have to do a lot of work to understand clearly one, where you’ll be in time– I mean, because you’re making lots of investments along the way. And then secondarily, how you can explain that to an investor so it relates to the things that they consider important from an investment strategy. This approach will never appeal to a money manager who’s just trading stocks, or a fast trader, what have you. It’s not that type of a strategy. So, it’s not going to appeal to people that take a very short-term orientation. However, it does appeal to a long-term investor. So, you need to one, figure out your business. Are you comfortable with going four or five years out? And secondarily, will that work with the people who own your shares? Now, those two things converged for IBM. I don’t know they would converge for everyone. If you have a high multiple on your stock, a high P/E ratio, you have a lot of momentum players in there. They’re probably not going to care about your long-term cash flow models. However, if you have a more reasonable valuation, you have longer term investors, those things become very important.

JUSTIN FOX: Now, one phenomenon that existed when you were CEO, but seems to be an even bigger deal now, is hedge fund activists who come in and say they’re not happy with the direction management is taking. Do you think that’s a bad thing, a good thing?

SAM PALMISANO: I’d say it depends. It can be disruptive if the approach that the activist takes is once that’s more personalized and not necessarily one that represents the collective thinking of the shareholder. However, the other side of that argument is that if the activist is really just talking about capital allocation and return to the shareholder, and takes an orientation, which is, hey, guys, you’re sitting on a lot of cash. Why don’t you give something back to the shareholder? There are lots of ways to create value other than just doing large acquisitions or strictly driving only the top line. There are other financial models that are relevant to us, and let’s discuss capital allocation. And then, a lot of times, if you stand back from the rhetoric or from the media coverage and you analyze what some of the activists are really discussing or pushing for, it really is capital allocation.

JUSTIN FOX: Which is something you think CEOs should be thinking hard about anyway.

SAM PALMISANO: I mean, at the end of the day, the CEO and the board work for the shareholder. And if capital allocation is in the interest of all your shareholders, not just one vocal shareholder, then clearly, you should be respectful of that and listen to their input. As I say, listen to their input, you’ll get divergent points of view, whether its dividend or share buyback or acquisition. But we found it helpful– at least I did, personally as a CEO– to listen to the large shareholder. In fact, even within the firm, their portfolio managers will take a different perspective. Some will want dividend. Some will want share buyback. But it was a worthwhile discussion for us to have. And then we could pass our own judgment as to what was the right mix, where we needed cash flexibility, a like and a like, or should we do this kind of acquisition versus another. But we did that– I mean, obviously not sharing information that was inside information. But we did in a way that helped, at least, shaped my thinking. And I think Mark Loughridge, our CFO, would say the same thing. They really were helpful in getting us to think through the elements of cash flow and balance sheet and how to best return the earnings and the gains to the shareholder.

JUSTIN FOX: But your book, Re-think, is– it’s a description of this idea of the global enterprise. But it’s also the story of how you went from this guy from Baltimore to the head of a global enterprise.

SAM PALMISANO: Well, that’s right. Well, you know, they needed color. The author– my co-author, this guy Matt Rees– said we have to have some color in here or people are going to find it so boring if you’re just talking about corporations and globalization and business process. I mean, it’s going to be really dull. So, I compromised for the first time in my 40 years in business. I said I’ll talk about myself. But I only did it for one chapter and that was that. So, I’m not big on talking about myself. I guess you probably sense that.


JUSTIN FOX: Sam, thank you so much for talking to us and not just listening.

SAM PALMISANO: You’re welcome. You know, it would be quite boring if I just listened and you did all the talking, right, Justin?


HANNAH BATES: That was Sam Palmisano in conversation with Justin Fox on the HBR IdeaCast. Palmisano is the author of the book Re-think: A Path to the Future.  We’ll be back next Wednesday with another hand-picked conversation about business strategy from the Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues, and follow our show on Apple Podcasts, Spotify, or wherever you get your podcasts. While you’re there, be sure to leave us a review. We’re a production of the Harvard Business Review. If you want more podcasts, articles, case studies, books, and videos like this, find it all at HBR dot org. This episode was produced by Anne Saini, and me, Hannah Bates. Ian Fox is our editor. Special thanks to Maureen Hoch, Adi Ignatius, Karen Player, Ramsey Khabbaz, Nicole Smith, Anne Bartholomew, and you – our listener. See you next week.

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