Corporate saviors: how markets form first impressions of CEOs
Claudius A. Hildebrand
Performance Catalyst, Student of Leadership, CEO Advisor and Analytics Leader at Spencer Stuart
On the day that CFO Jay Horgen was announced as CEO of Affiliated Managers Group (AMG), shares dropped a whopping 12%. Markets were quick to form an opinion. A company in distress was getting more of the same. In the consecutive weeks leading up to his start date the share price continued to tumble by another 11%. Countering the strong confidence vote against him, Horgen proved his skeptics wrong in spectacular ways, nearly doubling enterprise value since. Horgen’s appointment is just one example of how strongly markets can react to CEO transition news – and how horribly they can be off.
Announcement day is the corporate equivalent of the baby shower. The announcement of a new leader offers a first glimpse into the future direction. Studying the transitions of every S&P500 CEO in the 21st century and their announcement, reveals a few important lessons:
1.??? Internal appointments get announced earlier
2.??? The closer to the transition, the more negative the reaction
3.??? Outsider appointments get a bigger bump
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?? The Big Reveal
New CEOs typically get announced 2.5 months before they start. Roughly 12% get announced on the very same day they take effect. And another 12% are way in advance with 6 months or more lead time. The vast majority happens anywhere between 30-120 days ahead of time.
? Internal appointments get announced earlier
Where the future CEO comes from matters. Internal appointments are announced sooner, on average three months before start. External hires, by contrast, are announced on average just six weeks before their start. Much of this is driven by the nature of the process: internal successions are typically planful, long-term processes that are meant to signal a gradual passing of the baton. While certainly not always the case, external CEO successions are more likely to occur at organizations in distress – in such cases, a long runway between announcement and transition may signal indecision.
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? The closer to the transition, the more negative the reaction
Generally speaking, announcements that occur close to the transition date lead to more negative share price reactions. Markets don’t like surprises. Abrupt transitions signal an unplanned departure and invite speculation. The organization may be in full disarray, or at very least little attention has been given to future-proofing its leadership.
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??Outsider appointments get a bigger bump
Unsurprisingly, underperforming companies typically get an announcement bump. What’s astonishing is that outside appointments see a far bigger bump, averaging +1.2%. Reactions to an inside appointments in similar circumstances markets remain flat. Skepticism prevails. To investors insiders typically represent more of the same. Jay Horgen’s announcement story at AMG is case in point.
Outperforming companies face a different dilemma. Change is generally not viewed as positive. Why meddle with a winning team? And the announcement confirms that: share prices typically drop, by an average of -0.6%.
Even in these situations, we see a bias for outsiders. Markets punish companies who appoint an insider, initially selling off their stock, on average share price drop 0.7%. A big question looming: can the internal successor step out of the shadows of their former boss?
Markets seem far less concerned about outsiders. Their appointment triggers an average positive share price change of +0.2%.
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The thrill of the unknown: why outsiders get market love
So are outsiders the better choice? Or is this just another form of bias? We don’t see conclusive evidence that inside or outside CEO appointments generally perform better across their tenure. The answer here may be a product of human psychology.
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Four ways for CEOs, boards and investors to make better choices
1.??? Be aware of The Grass is Greener syndrome – Outsider appointments gather bigger headlines, which means more information that markets can glean from. Typically, much less is known about insiders. Yet, what may look better?on paper may not always be true in practice.
2.??? Don’t judge a book only by its cover: Systematic succession planning, rigorous assessment, and intentional development are needed to set any leader up for success. Announcement bumps are only one example of the many biases surrounding CEOs.
3.??? Timing matters – Investors prefer clarity. The earlier the announcement, the more muted the market reacts to the changing of the guard. Yet, the further out the announcement, the more internal speculation about the future CEOs. Boards must weigh both aspects.
4.??? Play the long-game – Incoming CEOs should not get rattled by initial market reactions. The same is true for boards. Instead, focus on the long-term value creation and how to accelerate the new leader into the role.
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Learn more about the myths and truths of leadership
In our upcoming book The Life Cycle of a CEO, we parse fact from fiction and explore how CEOs develop into great leaders. By analyzing thousands of CEO tenures and conducting over a hundred interviews with CEOs and board directors we identify a roadmap to corporate success.
If you would like to learn more, pre-order your copy of "The Life Cycle of a CEO " today. And follow along these newsletters, where we will share more exclusive content.
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Standing on the shoulders of Giants
This Life Cycle project would not be possible without the generous contributions of great leaders and luminaries who have influenced our thinking and made our insights better.
Special thanks to everyone who has supported the CEO Life Cycle project over the years and especially to Jim Citrin , Marshall Goldsmith , Stephen A. Schwarzman , Indra Nooyi , Carol B. Tomé , Hubert Joly , Chris Nassetta , Courtney della Cava , Herminia Ibarra , Mark Hoplamazian , Nigel Travis , Doug Steenland , Bill George , Ram Charan , Scott Osman Fabio Moioli , Nick Bloom , Navid Nazemian, PCC , David Novak , Piyush Gupta , Roger W. Ferguson, Jr. , Darren Walker , David Dorman , Roger Martin , Brandt Mc Kee , and Scott O'Neil
And a special shout-out to Roald Schuring for the great collaboration exploring the myths and truths of CEO success.
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1 个月A fascinating book Claudius A. Hildebrand and a must read guide for leaders seeking to navigate the complexities of their role with wisdom and adaptability. Congratulations!
I agree this is a lost art and have experienced the entire spectrum of the good and the not so good
Ranked as World‘s #1 Executive Coach, Bestselling Author, Keynote Speaker, NED
2 个月Excellent insights ? as always ???? Claudius A. Hildebrand! You are making an important point by highlighting the days it takes between announcement and the COE starting in their new role. ?? This is one of the reasons why in my Double Diamond Framework of Executive Transitions the first phase ?Discover“ ranges from minus 90 to Day 0 of the newly appointed executive. This phase is often referred to as before onboarding, pre-boarding, or before the starting line (see also Michael Burroughs seminal book on the same). The key tasks for the onboarding executive during this phase are to understand the business and its context, establish their credibility, and start to leverage their (new or existing) network and relationships. For some, this also involves learning about the dynamics and value chain of a new industry. So, if the executive has been hired internally, they may have a little head start here. This is despite common belief that people leaders wait until Day 1 and be done at Day 90 of being in a new role. P.S. I appreciate ???? you calling me a ?luminary“, and I will add this one to the half of fame ??
Executive Search Consultant and Director of the Board at Spencer Stuart; Forbes Technology Council Member; Faculty on AI at Harvard BR, SingularityU, PoliMi GSoM, UniMi; TEDx; ex Microsoft, Capgemini, McKinsey, Ericsson
2 个月great insights, Claudius! Highly interesting!