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All change: what to look for when a company recruits a new CEO
One of the key ingredients in the success or failure of a company is the quality of its management.
When change at the top of a struggling company occurs, it can act as a catalyst for an underperforming business and trigger a share price boost, while the wrong CEO appointment has the potential to ruin a hitherto successful business and undo all the painstaking work of his or her predecessor.
There are many nuances to consider when it comes to weighing up the impact of a CEO transition, and as in so many investment scenarios, timing can be key.
In some instances, CEOs who’ve done a terrific turnaround job may be looking to get out while the going is good, while reputations are riding high, though there are a good many companies whose bosses have paid the price for under-performance or ill-judged strategic or other decisions.
WHAT HAPPENS WHEN A NEW CEO COMES IN?
When a new CEO comes into a struggling business, he or she might decide to embark on a radical strategy to turn things around. Alexandra Jackson, manager of the Rathbone UK Opportunities Fund (B7FQM50), says a new broom will often sweep in to ‘kitchen sink the numbers’, which is the market vernacular for getting all the bad news about the business out of the way in one fell swoop.
Jackson says new CEOs will sometimes issue ‘a backwards-looking profit warning’ or report a big accounting impairment, which resets market expectations and basically clears the decks for better news going forwards.
Needless to say, the new boss will take credit for the upswing in fortunes and the share price should rise as performance turns round and the company beats rebased forecasts. Existing shareholders in such situations should beware, since they might have to suffer share price-damaging downgrades as new management massages analysts’ estimates.
Jackson says new CEOs may also ‘ask to reset their LTIPs (long-term incentive plans), as they won’t want to be beholden to the former CEO’s targets’.
Seasoned investor Julian Cane, manager of BMO Capital & Income Investment Trust (BCI), says ‘it is often in the interests of the new CEO to rubbish the old team’ and ‘get the share price down’, with option strike price targets in mind.
When it comes to embattled businesses, new CEOs will typically announce a turnaround strategy, often communicated to analysts in-depth at a CMD (capital market day). This can have the effect of boosting the share price if investors consider the plan has a good chance of success.
Taking over at an already-thriving company can be a poisoned chalice for a new CEO, particularly if they are succeeding a rock star of a leader. In such instance, you might see modifications to a tried-and-tested strategy, so that the new CEO can put his or her stamp on things, although often it will be business as usual. As the saying goes, ‘if it ain’t broke, don’t fix it’.
Incoming CEOs at flourishing firms sometimes rave about how fantastic the business and team they have inherited are, before going on to tighten up the business in terms of cost, or drive it a bit harder, perhaps by being bolder when it comes to acquisitions for instance.
Professional fund managers will often watch the body language between the new broom and the incumbent CFO; the latter might have been an internal candidate for the top job and if they are disappointed at missing out on promotion, they could follow the previous CEO out the door, creating unwanted boardroom uncertainty.
PICKING UP THE BATON
Some big names have been stepping down among the blue chips of the FTSE 100 of late, leaving big shoes to fill. A smooth succession is in train at Anglo American (AAL), where respected mining industry supremo Mark Cutifani will step down as CEO next year, having successfully led the £39 billion cap mining behemoth since 2013.
He leaves a strong legacy for his successor, internal candidate Duncan Wanblad, who chairman Stuart Chambers insists was ‘the standout and natural successor’ to Cutifani, bringing ‘30 years of international mining experience and deep understanding of Anglo American, its culture and its context’.
Share prices can rise when a CEO resigns, if the market didn’t like the incumbent, as it suggests optimism towards the company finding someone better to do the job. Equally, share prices can fall when a CEO resigns if they are an integral part of the company’s success.
In the case of Barclays (BARC), its share price decline was limited on the news (1 Nov) Jes Staley had stepped down as CEO with immediate effect in order to defend his reputation and contest how the FCA and PRA have chosen to characterise his relationship with the disgraced Jeffrey Epstein in their investigation.
The price damage was likely limited because Staley had already dropped hints that he might step aside sooner rather than later and Barclays clearly had a succession plan in place, given how seamlessly internal candidate C.S. Venkatakrishnan or ‘Venkat’, has taken the reins as chief executive, pending regulatory approval.
Staley’s achievements included fending off Edward Bramson’s call for the investment bank to be spun-off, as well as honing the bank’s strategy and cost base, although the shares fell by 9% during his near-six-year spell as CEO. Shareholders will be looking to Venkat to improve upon that record.
Shore Capital’s Gary Greenwood said: ‘The news of Mr Staley’s sudden departure is very disappointing to us as we believe he has done an excellent job in improving the performance of the group in recent years, both in terms of strengthening its capital position and increasing profitability.’
Greenwood added: ‘In Venkat, Barclays has an experienced and well-respected replacement, and the fact that he had already been identified for the role means that there should be little disruption caused by this transition. Indeed, Barclays has clearly been planning for such an occasion for some time.’
Elsewhere in the FTSE 100, Burberry’s (BRBY) departing CEO Marco Gobbetti is handing over the business in better shape than he found it as he prepares to give way to Jonathan Akeroyd next spring.
The luxury goods group’s shares fell sharply in June on the surprise news Gobbetti would leave the company at the end of 2021, as he had led the transformation of the brand and the business. As an alumni of Versace, Akeroyd looks tailor-made for Burberry, but investors face greater uncertainty nevertheless, as the new boss might choose to unstitch parts of his predecessor’s hitherto successful strategy.
PRITCHARD LEAVES PETS AT HOME
Pets at Home’s (PETS) shares fell (3 Nov) on disappointment that CEO Peter Pritchard will step down in May next year, after having successfully completed the turnaround of the pet accessories-to-veterinary business. The search for his successor has commenced and there will be no shortage of internal and external candidates, as Pritchard leaves the business in rude health.
Under Pritchard’s tenure, which began in March 2018, the financial and operating performance of the business has improved and the shares have increased nearly three-fold. And as Liberum Capital commented: ‘There may be disappointment on the news of the CEO’s departure, however he leaves the group better positioned than ever, following a very impressive turnaround. We expect Pets to be able to attract a new, high quality CEO.’
At £29.16, shares in Keywords Studios (KWS:AIM) are around 20% higher than the £24.34 level at which they closed on 15 June. This was the day the video gaming industry technical services provider announced that long-serving leader Andrew Day was taking early retirement following a temporary leave of absence for health reasons.
Day’s decision to retire was a seismic moment, given the scale of success that Keywords had under his leadership, yet fears for the future of the business have subsequently been assuaged by the appointment of a high calibre successor, Bertrand Bodson.
A digital transformation expert prised from Novartis, whose CV also includes a stint at Argos, Bodson takes the reins at Keywords next month. With the odd refinement, Shares expects Bodson will stick with Keywords’ successful growth strategy, which involves consolidating a global, yet fragmented industry through bolt-on acquisitions.
Investors should keep the following companies on watchlists, as they are all on the lookout for fresh leadership and a well-received CEO appointment could provide an upside catalyst. They include online fashion retailer ASOS (ASC:AIM), whose share price performed poorly for chunks of the six-year tenure of Nick Beighton, who recently paid the price for the latest guidance downgrade.
Whoever he or she is, Beighton’s successor will need to ensure ASOS turns product designs around quicker to stand out from the fast fashion crowd and accelerate the growth of Topshop in North America, as well as execute against ASOS’ ambitious new ESG (environmental, social and governance) goals.
And in the small cap ranks, shares in floorcoverings distributor Headlam (HEAD) have weakened from 493p to 460p since CEO Steve Wilson unexpectedly stepped down following an extensive executive career with the business. Finance director Chris Payne is filling in as interim CEO as the quest for a permanent CEO continues.
Investors are nervous as Wilson has been integral to the long-run success of Headlam, having overseen the acquisition and growth strategy that has led it to being a clear market-leader. As CEO for the past five years, he also instigated and oversaw its business change strategy, ensuring Headlam is now well-positioned to grow its sales and expand its operating margins.
Also on the lookout for a new leader is agriculture-to-engineering combine Carr’s (CARR). Hugh Pelham, who only joined the £133 million cap at the beginning of 2021, caught the market off guard by stepping down as CEO last month ‘to pursue other interests’.