Do Chief Exec Exits Hit Share Prices?
The rapid turnover of FTSE 100 chief executives in recent years should be a concern for investors, unless a proper succession plan is in place
(Morning Star)The past year has a seen a flurry of FTSE 100 chief executives announce their departures, with three in October alone. Tesco’s Dave Lewis, Imperial’s Alison Cooper and BP’s Bob Dudley have all revealed plan's to leave their top jobs this month, following a five-year trend of high turnover of bosses at blue-chip companies.
At Morningstar they urge investors to “ignore the noise” of markets in the short-term, but it’s hard no to lose focus when a long-established chief executive steps down, particularly as it often results in share price volatility.
Investors are right to wonder whether a top boss’s departure means the “end of an era” for a high-flying company. Especially when, as was the case for WPP’s Sir Martin Sorrell, an individual becomes intrinsically associated with a company.
The tenure of chief executives is getting noticeably shorter as pressures grow to perform in an increasingly competitive world; Tesco’s Lewis spoke of the intensity of the retail environment as one of his reasons for leaving.
It’s difficult to generalise about chief executives’ departures: some leave on good terms having done a decent job (BP’s Bob Dudley, Tesco’s Dave Lewis), some are sacked (Barclays’ Anthony Jenkins, Tesco’s Philip Clarke) and some leave under a cloud (WPP’s Sorrell, Persimmon’s Jeff Fairbarn). The line between “stepping down” and “being fired” is often a matter of semantics.
Regardless of the nature of a boss's departure, shares prices are often turbulent in the aftermath of an announcement. But what about the year later? We have looked at some of the most high-profile FTSE 100 chief executive departures of the last five years and used data from AJ Bell to compare the impact on share prices a month after the announcement compared to a year later (on a total return basis).
Losing and Winning Streaks
In six out of 10 cases, a short-term share price fall was followed by a fall over a 12-month period. So in our table, the majority of departures caused a fall in the share price.
On the flipside, in two cases where the share price rose immediately after the announcement, it continued to climb over the year. One example of a rise followed by a rise was the well planned and smooth transition from Glaxo veteran Andrew Witty to insider Emma Walmsley - GlaxoSmithKline shares climbed 7% in the month after the decision and were up 26% a year later.
Perhaps more surprising is that WPP shares rose even after the shock changeover from Sir Martin Sorrell to Mark Read. The abrupt and controversial departure of Sir Martin, who founded the firm in the 1970s, was greeted with a near 10% gain the first month and shares were up more than 20% in the following year. Sorrell left after an investigation into his behaviour and the view among some analysts was that his departure was probably overdue after decades in charge.
At Tesco, the ousting of Philip Clarke prompted a share prices fall of 15% in the month after the announcement in 2014. They continued to tumble and were down 23% after year. This fall was consistent with the reputational damage caused by the accounting scandal and subsequent profit warnings at the firm. The departure of the next chief executive, Dave Lewis, this month also caused a wobble - albeit a short-lived one - in the share price.
Two of the most extreme share price falls can be seen with Barclays and Royal Mail, whose share prices plunged 43% and 49% respectively in the year after their chief executive changeovers were announced.
At Barclays, Antony Jenkins was sacked in July 2015 and Jes Staley took over in December 2015. The bank has faced a number of challenges in recent years, which have weighed on its reputation. This includes an attempt to unmask a whistleblower, which earned Staley and the bank a fine – and a rap on the knuckles by the FCA – and an unsuccessful intervention by activist investor Edward Bramson. A bailout by Qatar during the financial crisis is currently the focus of a criminal trial brought by the Serious Fraud Office, and three former Barclays executives are giving evidence at the Old Bailey.
Royal Mail shares floated with great fanfare in 2013, with hoardes of private investors jumping on the bandwagon. Life has got a lot tougher as a listed business, with competition, industrial action and profit warnings all providing challenges to new boss Rico Black. The company’s share price peaked at 631p in 2018 but is now around 220p.
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