Change at the top comes with a cost

The arrival of a new boss tends to damage the value that a company creates for its shareholders, even when the appointment is carefully organised.

It is widely accepted that shareholder returns often fall in the year before and after a chief executive has been ousted, since the fact that he or she has been forced out is generally a response to a company being in trouble.

But planned successions have become such a feature of good corporate governance practice, that their negative effect on shareholder value is more striking.

Research by Strategy&, the consultancy formerly known as Booz and Company, has found that in the year after a planned succession, the median total shareholder return (TSR) generated by a company is below the performance of the stock market index in its region. The study looked at CEO succession in the world's 2,500 largest quoted companies by market value.

The consultancy found that in every year except one over the past decade, median TSR fell in the year after a planned succession, relative to regional performance. When the data were grouped over three-year periods to increase the sample size, the story was essentially the same: the relative underperformance was never less than 1.4 per cent and could be as much as 3.5 per cent.

Per-Ola Karlsson, a partner at Strategy&, says any change at the top creates a lack of clarity at a company. Executives at the higher levels ask themselves if there will be a strategic shift or a reappraisal of priorities; and whether their own jobs will get better or worse, he says, and "that uncertainty resonates through the rest of the organisation".

"There is a loss of momentum, and things stall or slow down until the company finds the new normal . . . and then things chug along again."

Anne Richards, chief investment officer at Aberdeen Asset Management, suggests a couple of factors that may influence shareholder returns after a planned succession.

She says that chief executives coming into businesses that are in relatively good shape may find it harder to make their mark on the organisation, and "may be a little bit too cautious about doing anything too radical". Equally, they may find a culture of "if it ain't broke, don't fix it" used to resist far-reaching changes.

Ms Richards also points out that in terms of market reaction, the bar for a boss coming in through a planned succession process is likely to be set higher than for a CEO replacing someone ejected from office. The scope for "significant positive surprises" is less than in a forced succession "where something has almost certainly gone wrong and the CEO has to make something happen quickly".

The Strategy& data suggest that in the year after a succession, companies often perform less badly when the move has been forced: in two of the three three-year periods, the dip in relative performance was less than in planned successions. But that followed significant underperformance in the year leading up to the CEO change.

The consultancy estimates that companies forced into successions in recent years have lost a potential $112bn in shareholder value - or about $1.8bn per company - more than if the successions had been planned.

In 2014, the proportion of forced successions was just 14 per cent of all the CEO changes in the study, its lowest proportion since Strategy& began analysing the information from 2000. It says that if the proportion of forced successions fell further, to 10 per cent, then that could help companies generate a further $60bn a year in shareholder value if everything else stayed the same.

Luxottica exemplified the downside of forced successions last year.

Early in the autumn, Andrea Guerra, who had led the group for a decade, stepped down after disagreements with Leonardo Del Vecchio, the founder and chairman of the maker of Ray-Ban and Oakley glasses.

His replacement was Enrico Cavatorta, who was a Luxottica veteran, but Mr Del Vecchio decided that the group needed a co-chief executive as well. He intended that Mr Cavatorta should be one of them, but instead he resigned in October, after just a few weeks, causing a significant drop in the share price.

The group then said that the two chief executives would be Massimo Vian, from within Luxottica, and Adil Mehboob-Khan, a senior Procter & Gamble executive.

In the UK, the highest profile forced succession last year was at Tesco. Phil Clarke, the chief executive who had succeeded Sir Terry Leahy three years earlier, was ousted in July after a profit warning and a failed recovery plan.

Across the 2,500 companies in the study, there were 357 CEO successions, a proportion of 14.3 per cent and very similar to the level in 2013. For the first time in five years, the highest turnover rate by region was in "other mature" countries, such as Australia, Chile and Poland. By sector, telecoms saw the most succession activity, for the fourth year in a row.

The tabular content relating to this article is not available to view. Apologies in advance for the inconvenience caused.

© The Financial Times Limited 2015. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation