The fear is not about the pandemic. It isn’t about the economy. It isn’t even about the political divisions across the world. No, the latest corporate challenge comes from internet message-board fans waging war with hedge fund investors using company stock as ammunition.
As recent headlines have recounted, the stock prices of several publicly traded firms recently skyrocketed—in some cases tripling in a week—not because of any changes in company prospects but because ordinary investors banded together to overwhelmingly buy shares in firms that hedge funds bet against. As the share prices increased, the hedge funds lost money, so to cut their losses they started unwinding their trades, which in turn pushed the share prices even higher.
The companies themselves were mostly caught in the middle, and experts say that’s probably where they should stay, despite the unprecedented volatility in their share prices. “It is not up to management or the board to speculate up or down on investor behavior,” says Dennis Carey, a Korn Ferry vice chair and co-leader of the firm’s Board and CEO Services practice. “To do so otherwise simply would draw the unwanted attention of regulators.” That said, he and other experts say that firms can reiterate to investors and other stakeholders during wild price swings that their public filings are accurate and that market dynamics that determine stock prices.
Aggressive investors buying, or selling short, shares in a particular company’s stock isn’t new, of course. The last three decades are filled with epic battles involving hedge funds or other big institutions making outsized bets on a company’s outlook. But what’s different this time is that those sophisticated institutional investors are being challenged by a group of mostly amateur or “armchair” investors who have banded together quickly and are repeatedly betting that they can beat the pros at their own game. At least in the first few weeks of 2021, the amateurs had the upper hand.
Leaders might be tempted to take their own aggressive actions, particularly as their employees’ net worth, and their own, is rising or falling dramatically, sometimes by the minute. But experts warn that the best action likely is just to tell employees to stick to their jobs. “Stay focused on business priorities,” says Richard Marshall, a Korn Ferry senior client partner and global managing director for the firm’s Corporate Affairs Center of Expertise. “The trading is an exogenous event with market forces and players over which they don’t have control.”
The one exception may be a company’s financial leaders. The CFO and others may recommend the stock price’s rapid rise—or descent—as a chance to remodel the firm’s capital structure, says Chad Astmann, a Korn Ferry senior client partner and global co-head of the firm’s Investment Management practice. “Leverage the run up or sell off accordingly for overdue balance sheet management,” he says. If the stock has been unduly punished, the company could buy back stock. If the stock has risen considerably, the firm could consider raising capital by selling more shares.
Whatever actions organizations decide to take, every every stakeholder on the leadership team needs to be aligned in their messaging response, both internally to employees and externally to the media, analysts, and investors, says Peter McDermott, a Korn Ferry senior client partner and a member of the firm's Corporate Affairs Center of Expertise. "Be clear about what steps the company is taking to navigate the situation, and that the right stakeholders are at the table when decisions are being made,' he says.