Why is this?
- It’s easier to ignore a problem then talk about it: We use dramatically more cognitive energy thinking and talking about a difficult topic. This means we are psychologically inclined to take the easier route and avoid it.
- People want to be liked: Because of this, we may avoid conversations or situations that we believe could result in being less likable or disliked.
- Psychology of survival: Many are afraid of being vulnerable. When asked about, for example, a recent failure, they may feel immediate fear. This is a survival instinct designed to keep weaknesses hidden.
How does this apply to fund managers?
Fund managers ask investors to trust them with their capital. This is no trivial request. The least an investor should expect in return is honesty; even when it’s difficult.
Let’s imagine things aren’t going well for a fund manager. They may have lost a key person, their performance has been poor, or there’s been an issue at one of their portfolio companies.
Some might try to ignore these challenges or avoid answering questions. But investors are smart and being evasive won’t win you any points.
Avoiding difficult conversations leaves the opportunity for someone else to create the narrative. In short, you lose control. This may be much more detrimental going forward than having a difficult conversation in the first place.
Let’s take the example of “Client A” (name changed to protect both the innocent and the culpable). Client A approached us to work on various elements of their branding and messaging. Part of this work involved in-depth interviews with their investors. There was only one thing many of those investors wanted to talk about: Client A’s investment in an industrial plant. A malfunction at the plant had led to an environmental disaster – which soon became a financial disaster for investors.
Although this incident had taken place a few years before the interviews, several investors became visibly angry while they talked about it. But it wasn’t the investment or the incident that got them so worked up. It was the lack of communication around it and the failure to attempt to rectify this relationship damage in the months that followed. One investor told us he heard about the incident from a peer. Even worse, another learned about it from their boss. Imagine the embarrassment!
Client A was very surprised when we presented our report. Their view was as follows:
- there was a failed investment
- it was reported to clients through the standard portfolio updates
- the clients did not seem very concerned about it – perhaps due to the other investments performing well
This type of disconnection from reality can be extremely dangerous in our industry. Client A mistook festering investor contempt for quiet acceptance of the realities of investing. Client A misunderstood their investors’ feelings because they weren’t speaking to them.
Fast forward a few years, and with a new focus on clear, timely communication, they are back on better terms with most of their investors. But this was costly - and avoidable.
The moment the issue was understood by the portfolio team, an investor outreach plan should have been formulated – and then put into action. No doubt there would have been some difficult conversations – but wouldn’t you prefer a difficult conversation to losing an investor?
Think about these three things the next time performance is soft, or an investment doesn’t go as planned, and maybe you – or your colleagues – will be inspired to pick up the phone:
- Trust is vital: Gaining an investor’s trust is crucial to securing and maintaining capital. If you’re found to be hiding something, it begs the question – what else are you hiding? Being upfront and honest builds respect. It means that if, in the future, another mistake is made, investors are more likely to give you the benefit of the doubt.
- No one wants to be embarrassed: Investors are people too and they want to avoid embarrassment. If an investor finds out some important information from a third-party rather than you, it can be very awkward. Particularly, if said investor has taken personal risk by vouching for you at their firm. Be the first to break the bad news, because hearing it from someone else will only compromise your relationship.
- Everyone makes mistakes, what you’ve learned from them is what matters: No one is perfect, and mistakes do happen. How you learn from them and improve can differentiate you from competitors. If you claim to have had a ‘perfect journey’, you’ll either appear dishonest or untested. Overcoming challenges enables growth. And most of the time, investors want to know what you’ve learned and how it has prepared you to be successful going forward.
Having difficult conversations may be hard. But it means you get to stay in control of the narrative and there’s a higher chance of maintaining trust with your stakeholders.
For more information about this blog post, please reach out to Amber Sharpe.
Reach out to our IR and Marketing team to learn more about why having a strong narrative is so important.
