Business is booming.

Don’t be taken in by the chief executive myth

Chief executives are leaving leading British companies in almost unprecedented numbers. Last year saw the departures of the bosses of Johnson Matthey, Prudential, Burberry, Smith & Nephew and Rolls-Royce.

And those are just a few names off the top of my head. I lost count by the end. Coming up, we know already that the chief executives of Hargreaves Lansdown and Unilever are set to step down this year, and Nigel Wilson revealed that he is clocking off after 11 years at L&G. The charismatic Wilson is 66, but others are much younger. So what is motivating these departures?

Perhaps because they can afford it. Chief executive pay has far outstripped that of most workers in recent years. According to PwC, the average FTSE 100 chief earned about £3.9mn in 2021-22, including bonuses. The past few years have been tough, and it should not be surprising if some of those bosses currently calling it a day have decided to take their money and find a beach. This is not an easy time to pilot a business and many took the job expecting to deliver shareholder value through growth, not through the downsizing and cutbacks now coming.

Other factors may be at play, though. Under rules introduced in the UK Corporate Governance Code in 2018, board chairs and non-executive directors are effectively required to be changed every nine years. The chair who appointed you may be more patient than the one who inherited you. And non-execs are in more of a hurry to achieve something. So chief executives are under greater pressure than ever to justify that pay and given less time to do it.

Shareholder response

Should investors be worried by a boss’s departure? Probably less than you might think. History tends to look on many chief executives in a harsher light than investors did at their departure. The classic example is Tesco’s Terry Leahy, regarded as one of the great retail managers of his generation when he quit. A couple of years later it became clear that the business had been hollowed out and the drive for efficiency had come at the cost of investment that left his successors with serious challenges.

The art of being a successful chief executive can include the timing of your departure, whether through luck or skill. Many leave just before factors beyond anyone’s control strike. With a hard landing for the economy still quite possible, perhaps we should expect more departure announcements soon.

Similarly, smart leaders time their arrival well — take up the reins at a very low point and you do not have to achieve a huge amount to look successful. It is often easier for a chief executive to go into a company when expectations are low. When a company is down it is unlikely to fall through the floorboards. Currently, projections for many companies are undemanding: if the slowdown is relatively mild it could be a good time to become a chief executive.

Limits of power

There is no easy way of telling how much difference a change at the top will make. Personally, I prefer it when successors are appointed from within. These people know the business well, making the transition smoother. A couple of senior internal candidates who fell short at the final interview may leave, knowing it could be years before they get another chance, but this affords scope for the next generation to come through.

An outsider is more likely to shake things up. I have seen that lead to problems. We ask: “Does a seismic cultural change need to happen within the business?” Sometimes a shake-up led by an outsider can be good.

Tufan Erginbilgic took the reins at Rolls-Royce, which we hold, at the start of the year. He built his career at BP. By the end of only his first month he had publicly warned Rolls-Royce staff and shareholders that the company needed to transform the way it operates or face demise. He called it a “burning platform”. 

The cynic might suggest that this tough-talk early intervention is simply the leader lowering the bar to make their subsequent achievement look more impressive. But I would disagree. If you come in identifying lots of problems, you raise expectations that you will remedy them. You put yourself under the spotlight.

We hope Erginbilgic succeeds. Many Rolls-Royce products are outstanding, and the company has potential to be a leading player in the transition to a low-carbon world. But his challenge highlights why so many chief executives burn out. Too often, perhaps, our expectations are unrealistic — can one person make such a difference?

If you wanted simple rules around what to do as an investor when a much-admired chief retires I am sorry to disappoint. There are none. The only advice I would give is not to act impetuously.

Market excitement means a company’s share price may tumble on the day a departure is announced, but it often recovers sufficiently for you to judge the new appointee properly. We usually put new management on closer watch until we are confident of their plans. We like to meet them quickly, not a luxury available to most investors, sadly.

Every situation is different. Do not adjust your company valuations without looking closely at the circumstances of the management — and do not be panicked into selling too soon.

James Henderson is co-manager of the Henderson Opportunities Trust and the Lowland Investment Company


Source link

Comments are closed, but trackbacks and pingbacks are open.