This article originally appeared on HBR.org.
Most companies see investor relations as a one-way street. When Bain & Company recently surveyed 51 top global executives about their investor relationship management practices, we learned that while most of them communicate at least monthly with investors and are segmenting their investor base for differentiated emphasis in communications, fewer than 6% of the companies involved have a formal structure in place to link investor relations with strategy and best utilize investor feedback.
Yet investors can be a powerful strategic resource, providing not only capital but also less-biased insight into the threats and opportunities that a company encounters. Nikon, the legendary Japanese camera maker, provides a textbook study in how smart managers can work with strategic investors to transform a struggling business. By 2016, the rise of smart phones seemed to have made the company less relevant: Its revenues were at almost the same level they had been a full decade earlier. They had surged with the rise of digital camera only to peak in 2012, coming back down as smart phones became widely used. Nikon watched its profits sink and its stock price at one point fell below liquidation value.
Then a new CFO joined the company: Masashi Oka, a financial industry veteran who had played a key role in transforming Mitsubishi UFJ Financial Group-owned Union Bank in the US. Oka had found feedback from US regulators very helpful in his efforts to revive Union Bank and saw an opportunity to do something similar at Nikon.
This time it was to investors that Oka looked. He reasoned that large institutional investors would be a smart, industry-savvy resource capable of providing insights into what the company was doing wrong and how it could shape a transformation. Immediately after joining Nikon, he decided to interview some of them.
What he heard was uncomfortable. He asked one former major investor for a reaction to the company’s prediction (accompanying poor quarterly results): “that the [current] market contraction will bottom out soon and our profits will improve.” The reply he got was like a cold shower: “Management is delusional about their long-term prospects,” said the investor, adding, “Every time we meet … it truly shocks me how far behind it is and how slow they have been to grasp the trends of the industry.”
This feedback helped Oka, an industry outsider, convince President Kazuo Ushida, a 40-year veteran of Nikon’s technology businesses, that the company needed to revisit its dialogue with investors. His idea was to turn investor relations on its head by using regular meetings with top-class investors as something akin to due diligence.
The first step Oka took was to segment Nikon’s investors based on their overall attractiveness to its investor portfolio. Companies often only consider how attractive their company is to investors but fail to weigh how beneficial an investor is to their shareholder portfolio. The right investor base can improve stock price, reduce volatility, and provide valuable feedback.
As a handful of other companies have done, Nikon was able to analyze investors’ trading behavior to segment actual and potential investors according to investment period, industry focus (and understanding) and the degree of investment diversification. In this way, Nikon could identify which investors it should target and cultivate.
Segmenting also set the stage for targeting communications. While companies are required to share the same materials with all investors, they can emphasize the elements that will be most relevant to particular investor segments—highlighting stable cash flow for pension funds or payouts for growth-oriented investors, for example. For its part, Nikon focused on cost optimization opportunities and balance sheet management when communicating to value-oriented investors and on long-term structural changes when communicating to growth-oriented investors.
The most important benefit of segmenting, however, was that it allowed the company systematically to identify those investors that would be most important for providing valuable feedback. Thanks to the analysis, Nikon could identify and then interview past investors to understand the reasons they had purchased and then sold their Nikon shares. Nikon could then follow up by asking what would persuade the investor to repurchase.
The uninhibited and unbiased views from its first round of interviews with these investors created a burning platform for change. Directly influenced by investor input, Nikon developed a restructuring plan that would carry a onetime cost of ¥48 billion ($460 million) but generate ¥20 billion ($190 million) in annual savings.
The plan involved reforming Nikon’s struggling semiconductor lithography and imaging productsunits, both potentially high-value-added businesses, by cutting fixed costs, reducing SKUs and focusing on high-value-added product lines. It also called for streamlining headquarters and cutting executive management’s compensation. The number of directors and officers would be reduced.
Simultaneously, Nikon would shift to portfolio-based management, redefining the role of each business in its portfolio to optimize resource allocation. It would implement targets linked to shareholder value, including ROE and ROIC. It would enhance its governance structure, improving transparency in leadership appointment, adding more diversity to the board and installing a more effective system for evaluating executive management performance.
After announcing this program, Oka reached out to 30 current and past investors to elicit feedback on the plan. The response was mixed. Some investors signaled that although the plan was a step in the right direction it did not go far enough. Commented one: “I’ve seen many transformations, but if the market is shrinking at 10% you really need to cut costs at a faster rate to maintain your margin. I assumed you had some further cost reduction up your sleeve.”
The company took note and duly committed to reducing costs at a rate exceeding market contraction. Six months later, with Nikon’s prospects looking much brighter, it was time to check in with investors. Their responses, like Nikon’s fortunes, had reversed course. The very same former major investor who had previously described Nikon’s management as “delusional” had now changed its tune. “I am very impressed with the bold actions you have taken thus far, and I look forward to monitoring your progress from here. It sounds like Nikon will be a very different company five years from now—at a minimum a much more profitable one.” The new attitude was reflected in the company’s share price: One year into its transformation, Nikon’s stock price had risen by 35%.
Thanks to this experience, strategy making at Nikon today has become a process of co-creation with investors. It’s a core part of the CFO’s work: Last year Oka personally met with 145 investors and his IR team collectively met with more than 500.
Shigeki Ichii is a partner at Bain & Company, a global consultancy, and is based at the firm’s offices in Toyko, Japan.