CEO Transitions I: Communicating Critical Events Key Findings
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. Dive deeper into the findings:
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.