313. Driving value with an investor mindset

0:01Jacob Marcus: A strategy needs to be taken to a certain level of concreteness in terms of measurable outcomes for it actually to be credible to an investor. And taking the investor forces a company to think through, where is this strategy going to get us in terms of growth, in terms of return on invested capital? And forcing that clarity often forces an additional degree of specificity, which is helpful. It really turns management discipline to focus on value creation.

0:27Ryan Davies: For McKinsey & Company, I'm Sean Brown, and welcome to Inside the Strategy Room. That was Ryan Davies, discussing the benefits of employing an investor lens to strategy and value creation. Ryan joins us today, along with Jacob Marcus, to discuss how the investor perspective can help uncover internal blind spots, better connect strategy to what investors value, and turn value creation into a management discipline. They propose a holistic investment thesis approach, anchored in five outside-in lenses, and provide a set of actions that CEOs and their management teams can take right now to outperform investor expectations.

1:09Ryan Davies: Ryan is a senior partner in our Washington, D.C. office who leads our capital markets practice. He's also a leader in our transformation practice. And Jacob Marcus is an associate partner and also a leader in our capital markets practice based in our New York office. Ryan, Jacob, welcome to the podcast. Thank you, Sean. Thank you for having us, Sean. So Ryan, I thought maybe you could start us off. It would be great if you could talk us through why value creation matters so much now and why the investor mindset that we're going to discuss today is so important.

1:39Jacob Marcus: Thank you, Sean. Very happy to. So first on why value creation matters, and I'll take it as a given that it is clear why value creation is important for your company and for your investors. But it's really broader than that. In our moment in our world today, when we have a wide range of outcomes being produced economically, including by capitalism, we have a degree of fragmentation and disruption politically and socially. And so the question of why value creation matters is an important one in our view to make sure we have a clearer point of view on beyond just making money for a company and its investors.

2:19Jacob Marcus: The good news is our McKinsey research is quite clear that this is important more broadly as well. Our McKinsey Global Institute recently did some research encapsulated in a book called The Century of Plenty. One of the things they looked at is why value creation and capital formation are so important to driving the wealth of nations and overall economic prosperity. And to give you just one sense of that, when we looked at over the last 100 years, the progression of capital stock per hour worked and workers and income per person, we see a very, very strong correlation between the two of them. And so what that means is when we see the wealthiest countries today, the United States, Switzerland, Germany, to take a few examples, some of the countries with the highest income per person today, they also have some of the highest capital stock per hour worked in the country.

3:14Jacob Marcus: And that capital is formed over years and decades, largely by companies attracting investors to invest that capital, then investing that capital for their companies and earning a return on their invested capital that's positive and promotes the virtuous cycle. You see, unfortunately, some other countries such as just take the examples of Brazil and Argentina, which are much lower on income per person. And actually, the interesting thing, contra perhaps to some perceptions, is that it's not so much a difference in the number of hours worked per company, but rather the return on the return on work is much lower in those countries, primarily as a function of the lower invested capital that the workforce is benefiting.

3:58Ryan Davies: Thanks for sharing that broad view, Ryan. Perhaps we don't often think about it, but we'll add a link to the Century of Plenty book in the episode description for those who are interested in that long-term perspective. Now let's zoom in and look at why this is important at the company or CEO or management team level and what might be a bit different in today's setting.

4:18Jacob Marcus: Value creation is also very important to individuals as well. And so we take here, for example, the CEO role of companies. You can have similar views for other executives and managers within companies. But when we look at the tenure of CEOs, one, it's just decreasing overall. But second, there's a pretty strong bifurcation on the basis of how CEOs' companies are performing versus their peers. So when we look, for example, at public companies and public companies who are three years into a CEO's tenure, there is almost a one in three chance that the CEO today of a company that is underperforming its peers leaves that role after approximately three years.

5:05Jacob Marcus: That's quite a strong incentive for any CEO in the role to make sure that they are meeting or outperforming their peers from a value creation perspective, because the patience of boards and investors has never been shorter than it is today. On the flip side, value creation performance drives company leadership longevity, but the reverse is true as well. If we look today at the most valuable company in the world, NVIDIA, it has had the same CEO, Jensen Huang, for 33 years. If we look at the magnificent seven, seven of the most valuable companies in the world today, all of them except one have had a CEO in place for more than a decade.

5:46Jacob Marcus: And that one exception is Amazon, where Andy Jassy has been CEO for five years, but was preceded by Jeff Bezos, who was CEO for 27 years. So a CEO being in place for a long time can drive significant value creation in a company, but they need to earn the right, earn the credibility with investors to do that in their early years. And that extends to management teams more broadly as well.

6:08Ryan Davies: So let's now shift to this imperative of taking on an investor mindset. What does that really mean? And why is it so important to understand this as a CEO?

6:19Jacob Marcus: One thing that's important to understand is the investment galaxy, so to speak, is quite large and diverse. There's not one monolithic investor mindset. There are many different types of investors. There are many other stakeholders in the investment galaxy. There's a recent book that I read this spring, which was excellent. And I recommend in particular to those of you who may be newer to this world, it's called The CEO's Guide to the Investment Galaxy. It's by Sarah Cohane Williamson, who's the CEO of a foundation called Focusing Capital on the Long Term. And she does a really nice job in a compact 200 pages of laying out all of the different stakeholders in the investment galaxy.

6:57Jacob Marcus: There's control investors, but there are also asset managers. There are also asset owners, which are both all of us as individuals and other institutions who invest as LPs. There's a whole world of intermediaries and advisors and commentators in the media in this world. And then there's standard setters, regulators, legal entities, and so on. And it's important to think when we think about the investor mindset about the diversity of stakeholders.

7:24Ryan Davies: So if we stick with the analogy, how do you identify who is in your galaxy as a CFO or CEO? How do you think through who those investors really are? Yeah.

7:35Jacob Marcus: And I'll take the example here of a publicly traded company. Obviously, there are different ownership structures possible. But for a publicly traded company, one of the things that a CFO, a head of investor relations in that department will typically do is want to have an understanding of who are their investors, right? And it could be control investors, folks who are interested in seeking control or active influence in the governance and affairs of the company. You've also seen an increasing growth in recent decades in more passive flows. So Vanguard and BlackRock and so on have very significant assets under management.

8:11Jacob Marcus: There's strong academic evidence for the benefit for individual investors of low-cost index funds as a vehicle. But for there to be real price discovery in the market, someone somewhere, whether that's an active, that's an intrinsic investor or a hedge fund or an activist or a quant fund, has to actually be looking at the numbers and expressing a point of view by buying or selling stocks on whether they think the stock will go up and go down. And as you all think about the investor mindset, the thing to think about is who are those folks who are making active decisions to buy or sell your stock materially?

8:45Jacob Marcus: And how can you convince them that your investment, your company is a valuable one, that they should overweight their investments toward, that there's real alpha for them, alpha being outperforming the market in investing in your company?

9:00Ryan Davies: And Ryan, that's a really good point. It's not so much about what the current price is, as it is about where you think it's going to go, and what that alpha will be going forward. So you have to have a really compelling story for the investor that matters.

9:15Jacob Marcus: Yeah.

9:15Ryan Davies: In your work with clients, then, have you had a situation where there were one or two investors where you actually sat down with them and asked, what are the things that you're most concerned about?

9:25Jacob Marcus: Yes, there are, I think, many examples of that. And maybe it's helpful to look at a couple of specific types of investors. This is not exhaustive, but three specific types of investors that may be involved in a company's journey. And at different points, obviously, companies are typically in dialogue or should be in dialogue with their most important investors. Of course, if our client service will sometimes speak with investors as well to help. But to think about, I'll give just three examples of types of investor archetypes with different perspectives. First is what we would call long-term intrinsic investors.

9:57Jacob Marcus: And these are investors, institutional investors, who they're not passive index funds. They're really expressing material points of view with buying and going overweight or underweight stocks in specific sectors, which companies they think will outperform. They typically have a low number of positions per investment professional. They typically have a longer term time horizon. And they typically invest because they believe they will generate alpha through investing in your company with the current direction, with the current management team, with the current board and governance. And we would say, simplistically speaking, those are the good men and women in the investor community.

10:40Jacob Marcus: Those are the ones you want as anchor long-term investors, those who are going long your stock in a differentiated way, not just because they're buying an overall market index or a sector index, and they're doing it because they believe in the company. So broadly speaking, the more a company can do to attract intrinsic investors, the better. Two other types which are out there and are more controversial, although I will also say, generally speaking, play healthy roles in a competitive active market ecosystem. One are activist investors. You all will probably have seen many stories of activist investors in the news.

11:16Jacob Marcus: That's actually because quantitatively, activist investors are more active than ever, certainly in North America, also increasingly in Europe and in other capital markets such as Japan, where they've been less active recently. And activist investors also invest in your company because they believe there is alpha to be generated. But they're coming from a very different point of view. They are coming from the point of view that real changes are needed to the current direction, the current management, the current board and governance to unlock the alpha, the full potential of the company, and that real changes need to be made, which can go as far as actually selling the company.

11:51Jacob Marcus: And if it's not selling the company, then it's real changes in direction, and they invest as a way of expressing that thesis. And then finally, we look at the world of private capital and particularly private equity. Private equity also invests in businesses because they believe they can generate alpha, but they have a much more control thesis. They're investing because they believe that with a change in control and under their direct ownership and governance, that a company can create a lot of value in excess of that, which is baked into its stock price today.

12:21Ryan Davies: I do have a question here related to meme stocks, these cases where the rapid participation of retail investors can actually have a material impact on a stock's trajectory, at least over the short term. So how do you account for those investors as you think about taking this investor lens? And do they actually have any impact on that traditional long-term intrinsic archetype?

12:42Jacob Marcus: Yeah, it's actually a wonderful question. Thank you for the question. And it's certainly another trend of retail investors becoming more and more influential, including because social media has enabled the retail investor community to speak and have dialogue and align around concepts in a way that frankly wasn't possible 20 years ago. And so you see stronger group expression of positions by a retail investor block than we did 20 or 20 years ago. It can cut both ways. We've seen examples where retail investors have come very strongly behind a stock and really moved it in a certain direction. We've also seen examples where they go the other direction, and that's difficult.

13:24Jacob Marcus: It's interesting also, one of the questions for a company, there are examples, and I won't name names, but there are examples of companies who have come, for example, under activist pressure and have made much more of a conscious effort than companies would have 10 years ago or maybe even five years ago to actively engage with their retail investor base. And we see companies even proactively engaging with their retail investor base, even in anticipation or before there's any sort of activist campaign. because if something gets to a proxy fight at the board level, it matters a lot to have credibility with the retail investor block and they can actually become a swing voting contingent in that kind of situation.

14:01Ryan Davies: Interesting. Thank you, Ryan. So Jacob, anything you'd add there? I would say at the end of the day, investors are all asking the same question. Why should I go long? Why should I buy your company for the next insert time period over other assets of the same risk reward trade-off? And taking the investor mindset helps you understand what these contingencies are looking at. And to spot blind spots and get ahead of them such that you can create as a company initiatives to go after value in the long term. And Ryan, now let's really dig in to what it means to take an investor mindset. How does it or can it inform what leaders are doing with their strategy and decision making?

14:48Jacob Marcus: I think that's well said, Jacob. First, it is just a way to reframe your thinking and identify potential blind spots that are often missed just because we get so focused when we're within our companies and within our existing strategies. There's a lot of cognitive biases that easily can steer us toward not taking a fresh perspective. And we found taking an investor lens is a very powerful way of forcing that fresh perspective. The second is strategy needs to be taken to a certain level of concreteness in terms of measurable outcomes for it actually to be credible to an investor and taking the investor forces a company to think through to quite a bit of specificity.

15:28Jacob Marcus: Where is this strategy going to get us in terms of growth, in terms of return on invested capital, in terms on our balance sheet, our risk profile, et cetera. And forcing that clarity often forces an additional degree of specificity, which is helpful. And then finally, it really turns management discipline to focus on value creation. And there are real choices about where to allocate capital, where to redeploy talent, and how to prioritize, frankly, scarce management bandwidth to drive the right priority initiatives to help a company reach its full potential.

16:04Ryan Davies: Now, I would add, Ryan, investors are thinking about your company and the value creation pathway on a daily basis. Sometimes management is looking so insular inside that they forget about tying actions to underlying revenue and earnings. And taking that step back on a semi-annual, annual basis is a very helpful exercise to understand what the entire ecosystem is thinking. To now more than ever, information has been democratized. There are thousands upon thousands of pages that companies are producing on a quarterly and annual basis. From everything from regulatory filings, your annual reports, your quarterly reports, capital markets days, individual press releases, you have supplemental disclosures, whether it's environmental, social and governments, whether it is presentations that are presented by the sell side analyst community.

17:12Ryan Davies: And then there's what I like to call tertiary data out there. That is everything from how customers are talking about your products or services online, how employees are talking about the ways of working sentiment at a company. Ten years ago, it was painful to read all these disclosures. And it would take a lot of time and you would see the best investors would go through and read every disclosure. Today, now more than ever, this can be analyzed in a matter of minutes, leveraging different Gen AI capabilities, and it's getting better every day. And so the barrier to entry to understand the path forward for a company and what is underwritten is significantly lower than it was 10 years ago.

18:07Ryan Davies: It's significantly lower than it was two years ago. So that sounds both exciting and perhaps a bit unnerving at the same time for CEOs. So Jacob, are companies actually doing this to themselves as well right now? That is our suggestion. I've seen some of the best companies out there, they do this on an annual basis, whether it is a board exercise or whether it is a top management team exercise, to understand how the strategy ties to the value creation roadmap, where there are gaps that are either actual gaps or perceived gaps, and therefore having a roadmap for how to change that. So Jacob, let's talk a little bit more about this notion of building the outside-in perspective and then applying it to yourself.

18:53Ryan Davies: I know that you work with clients to help them do that, so this might be a good point to introduce the holistic investment thesis. Thanks, Sean. Yeah. And when we think when we talk about a holistic investment thesis, ultimately, we are trying to answer three high level questions. What is underwritten in the equity today? What are the performance gaps and what is the value creation path forward? So what do I mean by that? If you remember anything from me today, it's life in capital markets is not about good versus bad. It's about better versus worse. And in order to understand the better versus worse, you need to understand what an investor has underwritten in your stock.

19:38Ryan Davies: If I rewind a little bit to what Ryan was talking about with retail investors, that creates, there's more information. There's sometimes more noise. It creates an even higher importance to understand what is expected from a growth margin and capital efficiency point of view in order to meet the expectations today. The second high-level question is around performance gap. We like to take a holistic view on this. This is not simply financial metrics, revenue growth, gross margin, EBITDA margin. This gets into the operational KPIs. This gets into how customers are talking about your products. This gets into how your employees are talking about the ways of working, how your organization is structured.

20:29Ryan Davies: How have you been trending versus yourself? How are you trending versus your closest peers? How are you trending versus aspirational peers? And then finally, that allows you to understand where you can be better at, where you are the best at, and therefore what actions can you take to close those gaps. And again, our council is not just thinking about this in terms of financial math. I need to close my SG &A to revenue ratio by 2%. It's what are the fundamental initiatives? What are the activities that I need to do tomorrow that will result in that financial gap? And do you see any typical blind spots that companies have as they are developing this holistic investment thesis?

21:18Ryan Davies: And what do they sometimes miss? I think the biggest blind spot that I see companies make is they don't understand the underlying expectations of them. Companies will have their annual plan, their long range plan, and they'll say, we're going to grow. I'm going to make up a number, 5 % for the next three years. But if the market, if investors actually expect them to grow six, seven percent, that gap can be very costly from a value creation standpoint. And you're seeing that a lot in, I won't name names, but you're seeing that a lot in a lot of companies in their quarterly earnings where they beat the last quarter, they beat their guidance and the stock is down because the expectations, the unwritten expectations were actually significantly higher.

22:09Ryan Davies: And so it's unbelievably important to understand the actual nitty gritty math behind effectively three things. What's the revenue growth expected for both the short term and the medium term? What's my margin expansion priced in? And then the third thing, what a lot of companies also forget, it's the balance sheet side. What is the invested capital expectations and efficiency for a company. Because fundamentally, value is the interplay between revenue growth and return on invested capital.

22:42Jacob Marcus: And I will undermine, not every company, but there are a surprising number of companies who do have a bit of a blind spot around the balance sheet and the invested capital, as Jacob mentioned, are very focused on growth and margin. And for some portion of companies, when we dig in, one of the things we find is when we're investigating an unexplained, confusing valuation gap, as it's really something about that, the invested capital it's taking to generate the growth and the margin that is weighing on investors' view of how much value the company will create.

23:15Ryan Davies: Thanks, Ryan. So I'm curious to ask, as tech and AI stocks continue to drive growth expectations, how has that affected investor thinking more broadly? You're choosing sectors and you're choosing companies within those sectors. So what's the AI effect, if you will, on the holistic investment theses that you're running with clients now? For example, where a company is competing against others that might be in a much higher growth sector?

23:42Jacob Marcus: Yeah, it's a great question. I heard a very funny anecdote the other day in the med tech space from equity analyst who basically said, if you want to understand how the med tech sector is doing, Look at how AI is doing because medtech is what investors rotate in and out of as they get hot and cool on the AI thesis. So you take that just as an anecdote. In the short term, it's absolutely having a mechanical effect for reasons like that one. One expression which I like a lot is that in the short term, the market is a voting machine and then long term it is a weighing machine. So right now the market is voting, swinging around quite a bit on the AI thesis.

24:25Jacob Marcus: In the long term, we have confidence that it will do what it has always done, which is weigh the actual value creation and performance.

24:33Ryan Davies: Jacob, anything you'd add? We've done some research on what drives total shareholder returns in the long term. And across decades, across sectors, it's improvements and contractions in return on invested capital. and you know there's a lot again in the short term there's a lot of sentiment swings but at the end of the day it's going to come down to earnings growth and the ability to create lasting and sustainable growth and and what you're seeing right now is a lot of question marks around how is ai impacting sustainable earnings growth for other sectors and so if you take the speculation and the exuberance away for a second, the ultimate question still comes down to earnings and how does what is happening in one sector impact potentially my earnings in the other sector?

25:31Jacob Marcus: I will also just briefly comment, the question highlights the importance of having a good view of your true peer set as a company, because if you're not feeding into the data center value chain and some other company in some industry is, very difficult to compare apples to apples, but it is when you're comparing with other companies, which are closest to you and every company should have a set of peers that it compares itself to, that is a more fair apples to apples comparison that should strip out some of those exogenous factors.

25:59Ryan Davies: Thanks. That makes sense. And perhaps we can get back to the holistic investment thesis now. And Jacob, can you tell us a little bit more about how you actually develop them in your work with clients? Thanks, Sean. And so we've talked a little bit in the theory about the three high-level questions. What we like to do is we like to think about a holistic investment thesis exactly like that, holistic. How does a company's impact all stakeholders, not just shareholders, stakeholders? And so we're going to talk through five distinct lenses, but there are more views to look at a company in. The first is financial.

26:36Ryan Davies: And what do I mean by financial? I mean, how is the share price trended? What is the multiple and growth outlook? What is embedded in the share price? The second is operational impact. How does a company actually make money at the unit economics level? This looks different for different sectors. If you're looking at a restaurant, you're talking about the four wall economics of a store. If you're looking at a manufacturing company, you're looking at that cost per widget. And there are different operational KPIs for different industries. And it is unbelievably important to understand those for your company to disclose them and how they're changing, and then internally have metrics and initiatives associated against those.

27:38Ryan Davies: Then we have the customer impact. At the end of the day, companies are selling something to someone. It could be a product. It could be a service. Understanding what customers care about. What are their key buying factors? How has that changed? You can't have a company without a workforce. Now, workforces are changing to become more identified, but there's people still at workforces. What's the shape of the organization? What are the spans and layers? How are the different functions broken down? How does that compare versus peers? What's the ways of working sentiment? Decision speed, accountability, sentiment towards innovation.

28:24finally ESG.

28:26Ryan Davies: There's a way that we can analyze how important this is for a relative industry. Then where a company ladders up against peers across different metrics. And what's somewhat scary is that a lot of the things that I just talked about, you can do all outside in, and you can do it in a matter of hours. Hours. Okay. So this also sounds very much like what a PE company might do though in evaluating a potential acquisition. The outside-in analysis, making decisions about which companies to purchase and which ones might have the highest benefit from both operational and other levers to improve performance.

29:08Ryan Davies: So how would you compare this idea of doing your own outside-in analysis via the holistic investment thesis to how the investor committee of a PE company might look at it? I would say this method is trying to imitate the process of a long-only investor. The lines are blurring between public investors and private investors, and you're seeing companies invest all along the spectrum. And again, ultimately, at the end of the day, an investor is asking, why should I go long company A versus the other risk reward opportunities available to me? And this is part of the process that they take. And the part of the difference is when people are, when, when investors are looking at creating a billion dollar position, they are going to be spending millions of dollars running through this.

30:10Ryan Davies: You can do a lot of this now in a rapid fashion, whether it is leveraging AI or not. But AI is your friend here because perception ends up being reality. Thank you. So let's explore the five lenses in a bit more detail now. And Jacob, I'm particularly interested in hearing more about what can be achieved in, as you say, a matter of days or even hours. So the first, again, is the financial lens. And I said, if you remember one thing from me today, it's life is not about good versus bad. It's about better versus worse. So how do you understand how to be better tomorrow? The process is literally standing up a model, a discounted cash flow model to understand what your share price has underwritten in it.

31:06Ryan Davies: And what do I mean by that? What are the combinations of growth, margin, and capital efficiency for the next 10 years to get to today's share price? Not what is in my budget, not what is my long-range plan, but if my share price is$10, what combination of metrics needs to get there? Because that is the bar that you need to beat. Now, the caveat is in cyclical industries, it can look a little bit bumpy, but ultimately it's a straight, you know, you can simplify it to a straight line. And that allows you, again, to understand what's going to happen if I grow 200 basis points ahead of what is priced in.

31:58Ryan Davies: What matters more for my valuation? Improving growth versus my benchmark, improving margin versus my benchmark. And it allows you to start to think about trade-offs around capital allocation, M &A, growth strategy in the same way that an investor looking at your company would. Ryan, anything you'd want to add?

32:20Jacob Marcus: No, I just think it's absolutely underlying the importance of having your own clear view of what is priced into your company's value today.

32:29Ryan Davies: The second major lens that we look at is operational. And this is a hard aspect to generalize. I like to look at a consumer company because at the end of the day, we're all consumers of something and we can understand how our own influence impacts a company. And the way to think about it, again, it's what are driving the unit economics of this company, breaking it down into how is foot traffic driving a situation where there's a box that you go purchase something from. Investors these days are purchasing cell phone data. They're purchasing credit card data. They're understanding how transactions are changing, not on a quarterly basis like companies are presenting, but on a daily basis.

33:24You can look at the actual pricing of products.

33:29Ryan Davies: And this used to be, had to be done by literally going to a store, writing down the price, coming back. You now can do web scraping. and understand kind of the entire price ladder that is offered. And then finally, understanding kind of how it all ties together. You know, what are the unit economics of the box? And therefore, what is the payback period for someone who's literally selling your product versus competitors? So you can, in the snap of your fingers, almost understand the complete sentiment for your you know, your day-to-day work. The third lens is all around how customers feel about your products.

34:13And traditionally, you'd have to go out and survey.

34:18Ryan Davies: And it took time. It took money. It's still a benefit to understand kind of what your customers are saying to you and to third parties. But now this can all be supplemented doing web scraping. Investors can scrape the 400 billion web pages globally, looking for keywords across things like Reddit, looking at academic papers, looking at review sites, understanding the key buying factors. And the beautiful thing about the web is comments are timestamped. So you can start getting a longitudinal view of how customers are changing perspectives for your products. Not only for you, you can do it for your competitors.

35:08Every company is also, you know, relies on their employees.

35:13Ryan Davies: And, you know, if I think about the lenses we've talked about, financial must do, understand the operational KPIs. Customer is different for everyone. but understanding how investors look at your workforce needs to be part of the equation. And it is amazing the information you can get outside in. You can see not only the structure of the organization, how many people are in finance, how many people are in sales and marketing, how many people are in operations. You can see how that's changed over time. And you can see a proxy for spans of control. So an investor can get a snapshot of, is this organization set up for success?

35:59Ryan Davies: And start tying that to the actual financial metrics. You see that SG &A as a percent of revenue is higher than peers. You look at the actual employees and you see that you're over-indexed. That's a tell that something is mismatched. But it's not just the people. there's also the culture of a company. Can a company absorb a transformation? This is becoming more and more important. You can see how employees are talking publicly about a company. And we use machine learning and AI to categorize comments and then also score them on a positive versus negative to get a sense of how a company feels about their leadership, their direction.

36:51Ryan Davies: How does it feel about accountability and coordination control? Is decision speed positive? Investors start looking at this to understand, okay, I need to change X, Y, and Z, but can this organization absorb it? Jacob, if we could just flip back to the company lens for a moment. I'm the CEO. And with all this public data and the proliferation of AI tools, what can investors see about my company that I would have believed might have been private? I was onboarding a new CEO last year. And he was two weeks into the job and had just finished interviewing his top team. And we had done this holistic investment thesis for him.

37:35Ryan Davies: and we were sitting together and he's like, let me give you the feedback that I've received. And he talks through it. And I said, oh, did you happen to read our document? He goes, no. And I said, well, that's exactly what the investment community is seeing too. And he was amazed about what he thought was information just for him and his top team that everyone is aware of. And you need to look for the grain of truth in all of this. This is how employees are talking publicly. This is how investors are looking at it. This is not to take the place of doing your own culture surveys, to do your own benchmarking.

38:17Ryan Davies: You need to understand the differences. And this is what is also being done in a rapid fashion. Right. And related to that, a question on the importance of doing primary research. So if we were on the deal team of a PE fund, for example, we'd probably do additional research to really understand and kick the tires, if you will, of the company and its performance. So in your work doing holistic investment theses, do you ever go deeper? For example, Jacob, you just mentioned the primary research on employee sentiment, for example. A thousand percent, Sean. This is what I call the tip of the iceberg.

38:53Ryan Davies: when you see either an investor looking to take a position or a company doing it on themselves, you start here. This gives you your day one hypothesis about where to go look next and where to actually spend the time. What customers do you want to be talking to? What part, what employees do you want to be talking to? Because this helps you allocate your time, both as an investor and as a management team. And again, I go back to the what is priced in and what matters for value creation. If you have a company, if you're part of a company that has a return on invested capital of 50 % and that is defended, you need to figure out how to grow.

39:43Ryan Davies: You don't need to be figuring out how to go from 50 % to 60%. The effort there is better used elsewhere. And so it's really understanding those trade-offs. So as a company, you do this to understand the trade-offs, where to spend your very valuable time. And investors using this to start to spot either problem areas or positions of competitive advantage. One question that I've received a few times is, I'm at an all-time high. I'm the best in class in my sector. Do I need to do this? And the answer is yes, because it helps you spot your blind spots. It helps you understand what is expected of you and who is catching up.

40:32Ryan Davies: So I think there's a final lens around social and environmental impact we should talk about. So tell us why this matters in the holistic investment thesis? It's important to be holistic. We've talked about financial, customers, workforce. It's also important to understand how you impact society. And you can run analyses outside in how important it is for this industry and where does this ladder up. And then ultimately, you can understand how moving across different metrics, whether it's emissions targets or governance-related topics, how that can impact value creation. And again, a lot of people like to brush over social and governance-related issues, but that impacts your culture and your ways of working.

41:27Jacob Marcus: And I will also say, obviously, the mood on ESG and in the investment community has shifted significantly recently. I think that the appetite for performative ESG measures is low and that those will not be value creating. We can debate whether they ever were. But at the same time, many of these stances, they really matter to a company's customers, direct customers or end customers, especially where those are individual consumers. And also many companies face real material to their value creation questions around their regulatory framework, around their license to operate, et cetera. Without naming names, I think we see many examples of those every week.

42:10Jacob Marcus: And so the relationship of a company with its stakeholders is absolutely incredibly important to long-term value creation and important to keep within the lens.

42:21Ryan Davies: So now we've taken the investor perspective. We've worked through the five lenses for this holistic, outside-in approach to develop the investment thesis. So what is this going to tell me about the company? And importantly, what opportunities does it bring to the CEO and their top team? For example, how might this translate into a potential roadmap to then outperform investor expectations? So you've done all these analyses. You have an idea of what's priced in. you have an idea of your gaps. What do you do with this? Ryan talked a little bit about this at the beginning. Taking the investor lens forces discipline.

42:57Ryan Davies: The concept is to understand the gaps, to understand how that ladders to an operational KPI, and to understand the initiative that will impact that in a time-boxed way and how that flows through into revenue growth, earnings and ultimately share price. At the end of the day, kind of the bar that I have in my mind is how do you double your share price in three to five years? That's not a random target. That is, our research shows that the top quintile and decile of companies across geographies, sectors, time periods tend to deliver total shareholder return of 15 to 20 % a year, that's doubling in three to five years.

43:52Ryan Davies: That is what investors are looking for. And so having that plan, not just an LRP backed by activity-based initiatives that impact operational KPIs is how you tie this all together. And it is what investors are looking for, whether it's in a capital markets day, whether it's the work that they're doing themselves, whether it is how they're talking between their own funds. Super. So Ryan, maybe before we close our discussion, it would be great if you could expand a little bit on what CEOs and their key leaders should be thinking about in the near term, say, starting in the next few days, to really get the ball rolling here?

44:36Yeah.

44:37Jacob Marcus: Just to close, we would offer six questions that you might think about as Monday morning or Friday morning or whatever is the morning when you listen to this. Six questions to consider for potential action. The first is, what is our value creation thesis as a company and how clear is it? The second is, what are the primary value creation trends in our markets and how are we positioned against them? One example that was mentioned earlier, data centers and AI infrastructure, obviously a big one. Health and wellness and consumer is a big one. There are others. And the fun thing about our world is that they change all the time.

45:17Jacob Marcus: The third question is, how do investors see and value our company and why? The fourth is, what are the operational proof points that could catalyze investors? And how are we mobilized to deliver them. Having a relationship with investors and telling a compelling story is important, but ultimately, as we talked about, capital markets are a weighing machine and they will weigh delivered performance against a compelling vision. The fifth is, what would an activist investor say about our company and our management team and how would we respond to that? And that's a type of readiness exercise we think every company benefits from.

45:57Jacob Marcus: And then finally, when is our next Capital Markets Day or next Investor Day? And what would be a home run for that day in terms of the content that we deliver, the narrative we shape, the interaction we have with investors during that day, and how it sets us up for successful value creation going forward?

46:15Ryan Davies: Thank you, Ryan. These are really great questions to sit down and talk through with one's management team right now. Ryan, Jacob, thank you so much for taking the time with us today.

46:24Jacob Marcus: Thanks, Sean.

46:25Ryan Davies: And thank you to all of our listeners for joining us. We hope you enjoyed the conversation, and we welcome your feedback and ideas for future podcasts. Just email us at itsr at mckinsey.com, which stands for Inside the Strategy Room. You can also share your ratings and reviews on any podcast player with many thanks to all who've already done so. We really appreciate the comments and feedback we receive every week and encourage you to keep them coming. And if you enjoyed this episode and would like to subscribe, you can easily follow our weekly series on any podcast player, where you can also access our entire library of more than 300 episodes.

46:58Ryan Davies: Finally, if you'd like to automatically receive our latest publications and insights, we encourage you to visit our strategy and corporate finance practice page at McKinsey.com slash SCF. You can also connect with us on LinkedIn, and we've included links for both in the show notes today. Thanks again for listening. We look forward to having you join us again next week inside the strategy room.

47:29Thank you.