In the 1990s, the market research firm Gartner was a Wall Street darling. Founded in 1979, the company had expanded during the 1980s, and by 1998 its top line was growing by close to 30 percent a year. Then from 2000 to 2004, top-line growth slowed, the core research business was down to 0 to 3 percent a year, and investors lost interest in Gartner’s stock.
They returned after a new strategy was put in place in 2004 and a new CEO took over. With leading indicators returning to double-digit growth, the company attracted many investors, who quickly drove up its share price. But in the third quarter of 2007, the company announced that a single unit would report full-year results at the low end of the forecast range. Suddenly, many investors who claimed to have a long-term commitment to Gartner and who had taken up a good deal of its senior executives’ time ditched the stock.
In a recent interview with McKinsey’s Timothy Koller and Werner Rehm, Gartner CFO Christopher Lafond explained the company’s current approach to investor relations: it now shapes its base of investors, carefully identifying those whom executives should meet, and does a better job of helping executives to prioritize their time and deliver their message.
The Quarterly: Gartner has changed its approach to communicating with investors in recent years. Describe for us what happened.
Christopher Lafond: When our new CEO, Gene Hall, joined, we established a long-term financial road map as a key element of our investor communications. We told our investors how we were running our businesses and where we thought we could drive performance over the long term—key measures, like revenue growth by business segment and margins.
And when we did that, we also identified the two or three metrics, for each segment, that would help investors understand whether we’re on track. We wanted to be really thoughtful and clear with our investors about which metrics they should watch closely and why—and then we promised to disclose our performance, good or bad, on those metrics every quarter.
We haven’t added a lot of new metrics. Instead, we’ve tried to remain consistent in our reporting, to explain why investors should only focus on these things, and to help them understand why these are the important ones. Like most companies, we have an enormous number of metrics we look at internally on a regular basis. But unless you’re looking at the metrics every day, understanding the relationship of each metric to the final outcome can be really challenging. And our approach is that externally reported metrics need to be straightforward enough to attract investor attention and that the connection between the metrics and overall performance must be readily apparent.
The Quarterly: And how have investors responded?
Christopher Lafond: They have responded very favorably to the road map—I don’t think many companies are as candid about where they think they’re heading. The feedback on the nonfinancial metrics we report has also been generally positive, and investors think we provide plenty of insight. We’re transparent about our results and why they are what they are, and most people haven’t said they wanted much more.
Investors have wanted more data only on one of our key strategies—sales force effectiveness and expansion. Investors will always want more information, but ours have focused on this area in part because of its impact on our strategic direction.
The Quarterly: Do you also give guidance on these key operating metrics?
Christopher Lafond: Generally, we don’t give guidance quarterly; we give it annually. At the beginning of every year, we’ll say how we think we’ll do for the year overall in revenue, EBITDA,1 and earnings per share. And since a number of our businesses are seasonal, we try to provide some color around the growth percentages that might be expected each quarter, because of the seasonality. So we may note, in our events business, that investors should expect, say, 10 percent of the annual revenue to be delivered in the first quarter and 30 percent in another. That gives investors some sense of how the seasonality impacts the business, without our giving a specific guidance number for every quarter.
Obviously, people can take the information we provide and create not only an annual number but their own next quarterly number as well. And, yes, we know what these numbers are. Yes, we pay attention to them. We try to do everything we can to help people understand our expectations for the quarterly skew of revenue and earnings. So if we think our analysts or investors have gotten it wrong, we’ll often try, on the next call or Q&A session, to provide some more color to help them better understand it. At the end of the day, whether the analysts’ consensus number is ours or not, it’s viewed as our number.
The key to getting it right is transparency and consistency. When you put out a road map and a set of targets, you need to be prepared to disclose them—whether they’re up or down. So we report on a set of consistent metrics every single quarter. We don’t report on different metrics in different quarters because that one’s bad and this one’s better. We certainly listen to the questions investors ask and use them as one input into whether or not we decide to modify our disclosures.
The Quarterly: Have you changed metrics over time—perhaps because the business changed?
Christopher Lafond: We’ve tried to be consistent because our strategy has not changed. As our strategy evolves, we’ll consider whether there are better metrics.
For example, we did improve our reporting around sales productivity. Sales force effectiveness and expansion is an important element of our strategy, so we were getting lots of questions from investors. Since we had been tracking an internal metric, we finally decided to put it out on the street. Now it’s a regular part of our discussions with investors, both on the earnings calls and one-on-one calls. The rest of our metrics have stayed pretty stable, mainly because the strategy has been consistent and we think those are the right metrics to assess success.
The Quarterly: What would you say to a company that fears disclosing internal metrics because they might give competitors insights into its operations?
Christopher Lafond: My view on disclosure is that companies need to be really thoughtful about focusing on the right investors. It’s not helpful to put out a bunch of metrics to placate investors focused on the short term, who are only looking for what will happen next quarter. All you’re going to do then is help people make short-term decisions that don’t support the value creation envisioned by the long-term road map. And, of course, we’re not going to give away some internal secret that will help competitors jump on our coattails.
But we do want to attract investors focused on the long term, who can understand the investments we’re making, why we’re making them, and the impact they will have over the next three to five years. So we invest a lot of time in understanding what information those investors really need, what kinds of questions they are asking, and what we should give them to make sure they get our story. If a metric reflects something important for these investors to understand, then, yes, we’ll disclose it. If not, we won’t.
The Quarterly: How do you attract a certain kind of investor—but not others?
Christopher Lafond: We certainly can’t stop people or funds from investing in the company, nor would we. But we can decide where to invest management time, and we won’t be spending lots of time and attention on people we think are going to be in and out of the stock really quickly. So our head of investor relations has been given clear directions that part of his role is to make sure that we’re spending time with the right people. He won’t schedule meetings with short-term, high-turnover funds for me, our CEO, or any other executive. If they ask for our time, he’ll say he’s happy to spend time with them himself, but he’ll decline to schedule time with us.
He’s done this not only when people call in but also when we go on nondeal road shows. Bankers and brokers usually want to put you in front of their highest-trading clients, who aren’t necessarily the clients I want to meet. So our head of investor relations actually gets on the phone and lets them know that I am not coming out unless we prescreen the clients we’re meeting. We’re going to review the list first and identify the people we’ll meet one on one. And if the bankers and brokers still want to invite all the most high-trading, high-turnover clients, we’ll give them a block of time—say, an hour over lunch—and we’re happy to meet with them as a group. We do the same thing at investor conferences.
And over the past 18 months, we’ve had a pretty dramatic shift in our shareholder base. We had, probably, eight or nine very-high-turnover, high-trading investors among our top ten holders. Today, only one is still in the top ten. All the rest are low- or moderate-turnover investors, many of whom have built up pretty significant positions. When we meet with them, we find that they generally tend to buy and hold for years.
The Quarterly: Some companies are concerned that if they take a hard line with the banks, they will lose analyst coverage or other bad things will happen. Have you experienced any of that?
Christopher Lafond: Nothing of the sort. The reality is that banks appreciate getting management on the road. And, ultimately, as much as they may have wanted to get us in front of one or two clients that are really important to them, they did get us in front of ten other clients. So we’ve generally had positive feedback. In fact, everybody we’ve gone on the road with has asked us back—despite our hard approach. So we’ve had no pushback, no threats to drop coverage, no impact from being more thoughtful about the people we spend time with.
The Quarterly: What does Gartner get out of these meetings with long-term investors?
Christopher Lafond: When you meet with the right investors, you gain some interesting insights. They ask thoughtful questions, because they really do their homework. They don’t ask about missing last quarter’s numbers by a penny or where we’ll be at the end of the next quarter. Generally, questions like those boil down to a lot of things that don’t add much value to our strategic thinking. Instead, these investors ask about long-term strategy—how will we respond if X, Y, and Z happen? Occasionally, they throw out a question that we should spend a little more time thinking about.
The Quarterly: In periods like the present, when the economy is coming up with surprises, how do you make sure that you have all the feelers out there you need to determine whether targets have to change?
Christopher Lafond: We actually had an interesting situation, from an investor perspective, as we were aggressively building our sales force. In the second half of 2007, some investors started questioning that strategy, saying the economy doesn’t look so good—it seems there’s a train wreck coming—and you guys are hiring salespeople. Isn’t that a really bad strategy?
So we did two things: we listened to that feedback, and we thought about the economy. We didn’t decide to stop hiring salespeople, but we started the year with a plan to go more slowly than our long-term expectation. We communicated that plan to investors, and at the time some thought it was great. But our business continued to be healthy, with research revenues growing close to our long-term objectives, and investors started asking why we’d slowed down, why we hadn’t just kept going. So we’re going to be a lot more thoughtful about the fact that over the long term—and we are leaders focused on the long term—we can continue to grow even in a challenging economic environment.
We take a similar perspective on analysts’ consensus numbers. We don’t want to let the street drive our behavior. We would rather have a conversation and say, here’s where we think we are, here’s why we’re there, and here’s why we feel comfortable not changing our long-term road map. So we use short-term annual guidance coupled with the long-term road map and talk about both to help people understand why, in any given period, our results may be a little more or a little less than they should be in the long term, but we’re not changing the longer-term view.
The Quarterly: Do you have an internal perspective on where your share price should be?
Christopher Lafond: We try to make sure that people, internally and externally, know that we don’t manage the business for day-to-day stock prices, or even from quarter to quarter. Our perspective is very simple: lots of different things can cause a stock to move around, but if we execute our long-term strategy and deliver our growth targets—both top and bottom line—then the stock price ultimately will follow. And if we get margin expansion because people think we will continue to grow faster, great.
Do we also have a perspective on what the stock price should be? Sure. But we don’t publicize that very broadly. In fact, I look at it, and a couple of other people look at it, and that’s it.
The Quarterly: Hypothetically, what would you do if you felt that the market overvalued your stock?
Christopher Lafond: One of the things we try to do is to make sure that we’re very balanced in our communication. Our leadership team doesn’t think that having a volatile or grossly undervalued or overvalued stock is good. Yes, everybody loves the stock to go up, but it’s not a good thing if a rapid increase in the stock price just sets us up for some unhappy shareholders down the line. So we much prefer to send very consistent, very balanced messages to make sure that people don’t get ahead of themselves. 
About the Authors
Tim Koller is a principal and Werner Rehm is an associate principal in McKinsey’s New York office.
Notes