3 Questions Investors Ask Themselves When Evaluating a CEO

Market volatility is back. Corporate valuations are under the microscope. Today’s leaders need to demonstrate they can manage through uncertainty and remain agile in the face of one black swan event after another.

When it comes to proving valuation, companies tend to focus on the tangibles like revenue growth, market share, and profitability. While these are no doubt important, stakeholders are also paying attention to the intangibles.

One critical intangible that often gets missed is the CEO’s ability to speak to investors. While companies understand how vital it is for the CEO to be a compelling public speaker, they might not realize that a CEO’s communication style and presence can impact corporate value. According to a 2020 study, companies led by a CEO who communicates effectively better withstood the initial negative share price impacts of the Covid-19 pandemic.

But what are investors really looking for from CEOs? When we picture the CEO who excels at public speaking, we imagine the leader who is charismatic and highly extroverted. And yet, in our conversations with investors and analysts, we hear again and again that charisma is not only insufficient, but it can sometimes backfire. Why? Investors, by their nature, need to be skeptical. Their job is to poke holes to ensure they are making sound investments. And when CEOs respond to skepticism with charisma, it can be perceived as a red flag. This does not mean charisma itself is bad, however. CEOs need to be well-practiced and confident speakers. Rather, it’s the perception of authenticity, authority, and credibility that drives valuation.

Based on our more than 20 years of work with executives and investors (several on the record for this article), we have distilled the three core questions investors consider as they assess a CEO and a company’s valuation.

1. Is the CEO confident, but not overconfident?

Authentic communication happens at the intersection of confidence and humility. Investors want to see that the CEO has confidence in the company’s strength — while not being blind to possible imperfections. We like to call this “reasoned confidence.” An overly optimistic presentation runs the risk of losing credibility. As one investor put it, “Don’t be a LEGO-movie leader telling us that ‘everything is awesome.’”

When executives feel overly compelled to “win” a discussion with investors, this can lead to over-promising, posturing, and a combative stance. This leads us to what we call the Top Gun Problem: “Your ego is writing checks your body (or in this case, your business) can’t cash.” Several years back, we worked for a company with a CEO who couldn’t help but volunteer his own long-term growth estimates during investor meetings. His estimates didn’t tie to the near-term financial outlook, and his exuberance quickly lowered investor trust — and the company’s valuation. “If you walk into a room…and sense arrogance in the room, that’s the biggest red flag,” explains Harry Shapiro, the head of Shapiro Capital Management.

Demonstrating reasoned confidence starts with the speaker’s physical stance and tone. We advise CEOs to use an open, generous stance (feet planted, arms above the waist, posture open and relaxed). It’s also helpful to pause purposefully to give the audience a moment to digest the message fully. Purposeful silence during a presentation, even a virtual one, brings people in and breaks the monotony of noise coming at the audience.

Don’t be afraid to acknowledge difficult challenges. CEOs sometimes shy away from openly articulating possible objections and obstacles because they don’t want investors to lose confidence. Ironically, investors gain more confidence when they hear their doubts and questions expressed by the CEO. By articulating the elephant in the room, you recognize your investors’ perspective, making them feel understood and valued. It also allows you to share your organization’s approach to problem-solving. At a recent roadshow, a CEO tried this strategy and boldly said to her investors, “You’re probably thinking, this idea hasn’t worked in the past. Why would it work now?” The investors nodded their heads in agreement. The CEO continued, “Yes, it won’t be easy. But let me tell you what we’ve learned from the past, and why this time is different.” Because she articulated investors’ concerns about the company’s performance honestly and directly, the investors were more open to hearing her ideas.

2. Is the CEO a straight-talker?

As one investor we work with explained, “I don’t want a CEO who gives some sort of politician-style answer to a difficult question. I want honesty. Don’t sugarcoat it and say, ‘Actually, it is a good thing that we’re firing half our workforce.’” A CEO needs to be able to clearly communicate the truth — even when it’s hard to hear.

One potential obstacle to straight-talking is an overly polished presentation. It is tempting to over-rehearse and over-polish investor presentations precisely because so much is at stake. While strong preparation is critical, it is crucial not to lose the immediacy of the message and the opportunity to read the room. It’s not about “Practice makes perfect.” Perfection is boring. Instead, practice to more fully connect with your audience and get your message across. One way to do this is to think about the meaning of your words each time you rehearse. Keep your words simple, direct, and free of jargon. And relentlessly prioritize your audience’s expectations and needs. Too often, we see executive clients present what they want to say rather than what the audience needs to hear.

Being a straight-talker is also about authenticity. Rob Stallard, Partner at Vertical Research Partners, puts it this way: “The last thing investors want is a cookie-cutter CEO. They want a personality and somebody who can get the job done.” We have found that leaning into personality, humor, and background goes a long way toward establishing credibility. Investors want to invest in an organization they understand and trust. It starts with what they hear from the person at the top.

3. Do they know how to listen?

If there is one skill that demonstrates executive presence, it is the ability to listen. One of the biggest red flags for an investor is a CEO who is so focused on their message that they can’t listen to outside perspectives.

Unfortunately, listening is one of the most challenging skills to master when the stakes are high. When asked a tough question by an investor, it is tempting to jump straight to the answer. This can be a missed opportunity to earn credibility by demonstrating the ability to listen.

Before answering questions, take a moment to reflect on the question — and the need driving it. It helps to breathe before you speak — and take a moment to clarify not only the technical question, but also the meaning behind it. For example, a question about your research and development investment strategy may also be about whether an investor can trust you with their money. A question about capital allocation is often a deeper question: “Am I a priority?” In addition to giving technical answers, show you hear what’s behind the question — and answer that as well.

One way to make sure to prioritize listening is to run a murder board before the presentation, where you bring in multiple outside perspectives to ask the CEO their toughest, trickiest questions. We want our executives and clients to face the harshest questions for the first time in the room with us, not in front of an investor, a client, or a camera. The CEO practices how to listen closely to the question and its intent, focus on the facts and not speculation, and answer in a way that connects with the audience. In short, the murder board finds the problems, risks, and bugs that insiders miss.

No doubt, investors are a demanding audience. We have found that the best investor presentations happen when CEOs focus less on impressing investors with their speaking skills – and more on communicating what their audience needs to know. Fortunately, the communication skills required to speak to investors — reasoned confidence, straight-talking, and masterful listening — are the same skills necessary to lead the business. A good leader already has these skills and uses them every day. An investor presentation is an ideal opportunity to show them in action.