CEO Transitions and the Risk to Enterprise Value Study
This website was created by FTI Consulting to promote their study, the first edition of their global series “Communicating Critical Events: CEO Transitions and the Risk to Enterprise Value.” However at some point this domain expired. When I discovered that the domain was once again available I bought it with the intent of restoring as much of its original content as possible from its 2011-2012 archived pages. The information posted on ceotransitionstudy.com is as relevant today as it was when the study was first released. There is no reason why such information should be lost when its domain expires. You can view this site strictly for its historical context or use the information presented in a useful manner.
I originally heard about FTI Consulting from a friend while we waited in line to get our cell phones replaced. My friend is the well known NYC corporate lawyer and former Queens Assistant District Attorney Benjamin Pred, who also happens to be quite knowledgeable regarding management and corporate leadership issues. I tease him about being a super crime fighter, but I really suspect he's headed for upper management some day and FTI is just the resource that can point him there. I have enjoyed the commentary on CEO culture since I own my own business - hence I take on that title by default. But the topics discussed here really apply to anyone interested in management and the responsibilities of the guys at the top.
FTI Consulting continues to be a global business advisory firm providing multidisciplinary solutions to complex challenges and opportunities. The Strategic Communications practice works closely with management teams and boards of directors, advising them on communications strategies that advance overall business goals and increase the value of their enterprise. To contact Consulting go to: www.fticonsulting.com/.
CEO Transitions and the Risk to Enterprise Value
Changes at the top pose an extraordinary risk for many public companies and their enterprise value. With CEO turnover levels at the highest rate in six years, managing this type of risk is now clearly considered normal course of business for most directors and boards
The new study, “Communicating Critical Events: CEO Transitions and the Risk to Enterprise Value”, conducted by the Strategic Communications practice of FTI Consulting, explores the risk inherent in CEO transitions, and challenges the traditional wisdom surrounding stock volatility and the threat to enterprise value around such critical business events.
Conducted by the Strategic Communications practice of FTI Consulting, this study is the first edition of the global series “Communicating Critical Events: CEO Transitions and the Risk to Enterprise Value.” The study draws from extensive primary research among institutional portfolio managers and analysts, as well as a global multi-year analysis of stock price performance surrounding CEO transitions.
The study’s findings show that CEO transitions resulted in a period of extreme risk to enterprise value. However, regardless of the circumstances, the true impact of a transition will not be realized until the months following the announcement. During this period, investors will evaluate new CEOs based on their ability to align their organizations to respond to change by setting the vision and strategy, establishing the appropriate expectations across stakeholder groups, and then engaging with stakeholders through new and diverse communications channels.
To better understand the risks associated with CEO transitions, the FTI Consulting study undertook the following research:
- To gain insight into stock performance, FTI Consulting reviewed all CEO transitions that took place at companies that had a market capitalization of greater than $10 billion at any point between July 1, 2007 and June 30, 2010. There were 263 such transitions in 35 countries, representing nearly one-third of all large-cap companies. Value at-risk (VAR) was then quantified, based on each company’s net stock price performance measured against a comparable benchmark stock index. This assessment was conducted for two timeframes: the date when the transition was announced, and six months following the start date of the incoming CEO.
- For each CEO transition, the company’s net stock price performance was measured against a comparable benchmark index. This analysis was conducted for two timeframes: the date when the transition was announced and six months following the start date of the incoming CEO.
- To gain additional insight into investor psychology related to CEO transitions, FTI Consulting conducted an online survey of 358 institutional investors in 37 countries. The goal was to understand the extent to which CEO reputation and leadership changes impact investment decisions and ultimately, enterprise value.
The study measures the actual enterprise value-at-risk (VAR) for a company during a CEO transition, taking into consideration multiple variables and scenarios surrounding the transition. In addition, the research explores the influence of CEO reputation on investment decisions and how investors assess an incoming CEO. The study also reveals what leadership teams can do to mitigate and manage risk to enterprise value during leadership changes.
- Profile of sample population
- Importance and influence of CEO reputation
- Understanding the value-at-risk
- Investor assessment of a new CEO
- Roadmap for New CEOs
Profile of Sample Population
FTI Consulting reviewed all CEO transitions that took place at companies that had a market capitalization of greater than $10 billion at any point between July 1, 2007 and June 30, 2010. There were 263 such transitions in 35 countries, representing nearly one-third of all large-cap companies.
Importance and Influence of CEO Reputation
The study confirmed the importance of CEO reputation as one of the factors most heavily influencing the investment decision.
Investors also indicated that the importance of the CEO’s reputation is amplified during periods of CEO change. Since fully 39% of investors said that they would be likely to sell a stock based solely on the CEO, while only 15% were likely to buy a stock based on the CEO alone, the transition of a CEO presents more downside risk than upside opportunity.
Understanding the Value-at-Risk
Analysis of actual stock performance showed that not all CEO transitions are created equal. The degree to which stock price is put at risk is proportionate to two main factors: how surprising the transition is, and how much corporate change results from it.
Investor Assessment of a New CEO
The most crucial factor in investors’ assessment of an incoming CEO is his or her track record of execution. Investors look for hard evidence of this track record and, in doing so, they look as close to home as possible. The new CEO’s former business associates, including customers/partners (78%) and former colleagues (69%), are more important in forming opinions of the new CEO, investors say, but third-party observers such as sell-side analysts (40%) or the media (27%) are also influential.
Roadmap for New CEOs
Overall, the study demonstrates how important it is to develop strategies for mitigating the risk of CEO transitions. Under normal circumstances, CEO succession planning can reduce the surprise element that contributes to increased risk. And knowing that an executive’s reputation will follow him/her from prior positions, due diligence into former colleagues and business partners may mitigate risk of organizational disruption or cultural clashes.
++++ POSTS ++++
Does Timing Matter?
October 20, 2011
Is there a time of the year when boards are more likely to be faced with the loss of a CEO than others? The answer seems to be yes. A simple look at the timing of involuntary CEO succession related to termination, forced or voluntary resignations seems to indicate the highest levels are in February-April and September-November. The scepter of poor year-end results and a looming proxy season might be the cause. This has interesting implications as companies look to build succession plans or prepare for proxy season.
The Seven Habits of Spectacularly Unsuccessful Executives
January 2, 2012
Sydney Finkelstein, the Steven Roth Professor of Management at the Tuck School of Business at Dartmouth College, published “Why Smart Executives Fail” 8 years ago.
In it, he shared some of his research on what over 50 former high-flying companies – like Enron, Tyco, WorldCom, Rubbermaid, and Schwinn – did to become complete failures. It turns out that the senior executives at the companies all had 7 Habits in common. Finkelstein calls them the Seven Habits of Spectacularly Unsuccessful Executives.
These traits can be found in the leaders of current failures like Research In Motion (RIMM), but they should be early-warning signs (cautionary tales) to currently unbeatable firms like Apple (AAPL), Google (GOOG), and Amazon.com (AMZN).
The bottom line: If you exhibit several of these traits, now is the time to stamp them out from your repertoire. If your boss or several senior executives at your company exhibit several of these traits, now is the time to start looking for a new job.
Here are the habits, as Finkelstein described in a 2004 article:
Habit # 1: They see themselves and their companies as dominating their environment
This first habit may be the most insidious, since it appears to be highly desirable. Shouldn’t a company try to dominate its business environment, shape thefuture of its markets and set the pace within them? Yes,but there’s a catch. Unlike successful leaders, failed leaders who never question their dominance fail torealize they are at the mercy of changing circumstances.They vastly overestimate the extent to which they actually control events and vastly underestimate the role of chance and circumstance in their success.
CEOs who fall prey to this belief suffer from the illusion of personal pre-eminence: Like certain film directors, they see themselves as the auteurs of their companies. As far as they’re concerned, everyone else in the company is there to execute their personal visionfor the company. Samsung’s CEO Kun-Hee Lee was so successful with electronics that he thought he could repeat this success with automobiles. He invested $5 billion in an already oversaturated auto market. Why? There was no business case. Lee simply loved cars and had dreamed of being in the auto business.
Warning Sign for #1: A lack of respect
Habit #2: They identify so completely with the company that there is no clear boundary between their personal interests and their corporation’s interests
Like the first habit, this one seems innocuous, perhaps even beneficial. We want business leaders to be completely committed to their companies, with their interests tightly aligned with those of the company. But digging deeper, you find that failed executives weren’t identifying too little with the company, but rather too much. Instead of treating companies as enterprises that they needed to nurture, failed leaders treated them as extensions of themselves. And with that, a “private empire” mentality took hold.
CEOs who possess this outlook often use their companies to carry out personal ambitions. The most slippery slope of all for these executives is their tendency to use corporate funds for personal reasons. CEOs who have a long or impressive track record may come to feel that they’ve made so much money for the company that the expenditures they make on themselves, even if extravagant, are trivial by comparison. This twisted logic seems to have been one of the factors that shaped the behavior of Dennis Kozlowski of Tyco. His pride in his company and his pride in his own extravagance seem to have reinforced each other. This is why he could sound so sincere making speeches about ethics while using corporate funds for personal purposes. Being the CEO of a sizable corporation today is probably the closest thing to being king of your own country, and that’s a dangerous title to assume.
Warning Sign for #2: A question of character
Habit #3: They think they have all the answers
Here’s the image of executive competence that we’ve been taught to admire for decades: a dynamic leader making a dozen decisions a minute, dealing with many crises simultaneously, and taking only seconds to size up situations that have stumped everyone else for days. The problem with this picture is that it’s a fraud. Leaders who are invariably crisp and decisive tend to settle issues so quickly they have no opportunity to grasp the ramifications. Worse, because these leaders need to feel they have all the answers, they aren’t open to learning new ones.
CEO Wolfgang Schmitt of Rubbermaid was fond of demonstrating his ability to sort out difficult issues in a flash. A former colleague remembers that under Schmitt,” the joke went, ‘Wolf knows everything about everything.’ In one discussion, where we were talking about a particularly complex acquisition we made in Europe, Wolf, without hearing different points of view, just said, ‘Well, this is what we are going to do.’” Leaders who need to have all the answers shut out other points of view. When your company or organization is run by someone like this, you’d better hope the answers he comes up with are going to be the right ones. At Rubbermaid they weren’t. The company went from being Fortune’s most admired company in America in1993 to being acquired by the conglomerate Newell a few years later.
Warning Sign for #3: A leader without followers
Habit #4: They ruthlessly eliminate anyone who isn’t completely behind them
CEOs who think their job is to instill belief in their vision also think that it is their job to get everyone to buy into it. Anyone who doesn’t rally to the cause is undermining the vision. Hesitant managers have a choice: Get with the plan or leave.
The problem with this approach is that it’s both unnecessary and destructive. CEOs don’t need to have everyone unanimously endorse their vision to have it carried out successfully. In fact, by eliminating all dissenting and contrasting viewpoints, destructive CEOs cut themselves off from their best chance of seeing and correcting problems as they arise. Sometimes CEOs who seek to stifle dissent only drive it underground. Once this happens, the entire organization falters. At Mattel, Jill Barad removed her senior lieutenants if she thought they harbored serious reservations about the way that she was running things. Schmitt created such a threatening atmosphere at Rubbermaid that firings were often unnecessary. When new executives realized that they’d get no support from the CEO, many of them left almost as fast as they’d come on board. Eventually, these CEOs had everyone on their staff completely behind them. But where they were headed was toward disaster. And no one was left to warn them.
Warning Sign for #4: Executive departures
Habit #5: They are consummate spokespersons, obsessed with the company image
You know these CEOs: high-profile executives whoare constantly in the public eye. The problem is that amid all the media frenzy and accolades, these leaders’ management efforts become shallow and ineffective. Instead of actually accomplishing things, they often settle for the appearance of accomplishing things.
Behind these media darlings is a simple fact of executive life: CEOs don’t achieve a high level of media attention without devoting themselves assiduously to public relations. When CEOs are obsessed with their image, they have little time for operational details. Tyco’s Dennis Kozlowski sometimes intervened in remarkably minor matters, but left most of the company’s day-to-day operations unsupervised.
As a final negative twist, when CEOs make the company’s image their top priority, they run the risk of using financial-reporting practices to promote that image. Instead of treating their financial accounts as a control tool, they treat them as a public-relations tool. The creative accounting that was apparently practiced by such executives as Enron’s Jeffrey Skilling or Tyco’sKozlowski is as much or more an attempt to promote the company’s image as it is to deceive the public: In their eyes, everything that the company does is public relations.
Warning Sign of #5: Blatant attention-seeking
Habit #6: They underestimate obstacles
Part of the allure of being a CEO is the opportunity to espouse a vision. Yet, when CEOs become so enamored of their vision, they often overlook or underestimate the difficulty of actually getting there. And when it turns out that the obstacles they casually waved aside are more troublesome than they anticipated, these CEO have a habit of plunging full-steam into the abyss. For example, when Webvan’s core business was racking up huge losses, CEO George Shaheen was busy expanding those operations at an awesome rate.
Why don’t CEOs in this situation re-evaluate their course of action, or at least hold back for a while until it becomes clearer whether their policies will work? Some feel an enormous need to be right in every important decision they make, because if they admit to being fallible, their position as CEO might seem precarious. Once a CEO admits that he or she made the wrong call, there will always be people who say the CEO wasn’t up to the job. These unrealistic expectations make it exceedingly hard for a CEO to pull back from any chosen course of action, which not surprisingly causes them to push that much harder. That’s why leaders at Iridium and Motorola (MMI) kept investing billions of dollars to launch satellites even after it had become apparent that land-based cellphones were a better alternative.
Warning Sign of #6: Excessive hype
Habit #7: They stubbornly rely on what worked for them in the past
Many CEOs on their way to becoming spectacularly unsuccessful accelerate their company’s decline by reverting to what they regard as tried-and-true methods. In their desire to make the most of what they regard as their core strengths, they cling to a static business model.They insist on providing a product to a market that no longer exists, or they fail to consider innovations in areas other than those that made the company successful in the past. Instead of considering a range of options that fit new circumstances, they use their own careers as the only point of reference and do the things that made them successful in the past. For example, when Jill Barad was trying to promote educational software at Mattel,she used the promotional techniques that had been effective for her when she was promoting Barbie dolls, despite the fact that software is not distributed or bought the way dolls are.
Frequently, CEOs who fall prey to this habit owe their careers to some “defining moment,” a critical decision or policy choice that resulted in their most notable success. It’s usually the one thing that they’re most known for and the thing that gets them all of their subsequent jobs. The problem is that after people have had the experience of that defining moment, if they become the CEO of a large company, they allow their defining moment to define the company as well – no matter how unrealistic it has become.
Warning Sign of #7: Constantly referring to what worked in the past