January 10, 2017
FTI Consulting’s Corporate Issues Study focuses on six key corporate issues – M&A, Shareholder Activism, IPOs and Spin-Offs, CEO Transitions, Regulatory Changes, and Crises – as seen through the eyes of institutional investors. Part II of the series takes an in-depth look at the role investor confidence plays when it comes to evaluating a variety of corporate issues including CEO Transitions, Regulatory Changes, and Crises.
In this portion of Part II of our series, we take a closer look at how investors evaluate executive transitions – what makes them successful, expectations for executive action on priorities, and the key elements and concerns influencing investors’ perceptions of a new leader.
Companies experience a broad variety of events, transactions, and issues throughout their lifecycles – and one of the most critical is a change in C-Suite leadership. A change at the helm can signify a change in strategy, a loss of faith among the Board in executive leadership, or even a crisis or public scandal that is causing upheaval in the C-Suite.
When a company handles a CEO transition well, the key elements contributing to his or her success are setting a new vision or strategy, executing on that strategy, and improving overall financial performance. And much of the measurement of success is time-bound: investors characterize a successful CEO transition by the incoming leader’s ability to demonstrate progress against a timeline of strategic milestones during his or her first few years in the position.
Foremost, investors expect the CEO to first communicate his or her vision for the business, articulate the strategic steps being taken to realize that vision, and construct the infrastructure needed to achieve his or her stated objectives.
Some activities are more urgent than others in investors’ minds: 70% of investors indicate they would be highly concerned if a new CEO failed to effectively engage shareholders in the first 90 days, while 60% indicate they would be highly concerned if he or she failed to set an appropriate capital and resource allocation policy over that same period.
Within an 18-month timeframe, investors expect the new CEO’s execution of corporate strategy will be implemented and operational. By this point, investors expect a new executive to be meeting his or her stated vision, strategy, and financial objectives. To confirm progress against a new CEO’s stated strategy, investors look to key indicators, including capital allocation, financial performance, and talent management.
It is notable that investors largely think companies do a good job at handling CEO transitions, indicating that 79% of all CEO transitions are successful.
Investors begin to shape their opinions of a new executive long before he or she ever executes on a strategy.
Prior to meeting a new CEO, there are distinct factors that influence the formation of institutional investors’ opinions. The factor cited as having the greatest importance was a previous record of delivering on goals – 78% of investors indicated this proven track record was of high importance prior to meeting. Other key elements include relevant industry experience and personal reputation.
And, when it comes to experience, company size doesn’t matter: relevant industry experience was cited as more important than experience at a company of similar size or even the company itself. In fact, experience at the company was seen as least important of all the factors we tested, perhaps an indication that investors are often excited about “new blood” in the C-Suite at a company.
While these opinions have already begun to take shape, the first meeting with an investor is a critical encounter for a new CEO.
During the initial interaction, investors look for an executive’s strategic plan and vision, as well as knowledge of the company. 80% of investors indicated that a demonstrated grasp of the company’s challenges and opportunities were of high importance in forming their opinion of a new CEO.
Also high on the list were a knowledge of industry dynamics and strategic plan and vision.In essence, investors want to ensure the incoming CEO understands the company’s situation and has a well-developed plan to create value.
Of less importance were characteristics like “leadership style” and “charisma.” At the end of the day, investors care more about applicable knowledge than stereotypical leadership traits. A given personality type or leadership style is ultimately less important than a clear understanding and plan for the company’s specific opportunities and challenges.
When a company announces an executive transition, there are obviously a number of concerns that may follow. Notably, investors are most concerned about some of those same activities they expect to be executed in the first 90 days of a CEO’s tenure, particularly setting a new vision and strategy as well as establishing expectations.
When investors are confident in a company, they are much less likely to be concerned about an executive transition and, as a result, are likely to give a new CEO more latitude in meeting expectations. If investors are not confident in a company or the abilities of the new CEO, their concern increases. Specifically:
Investors who are confident are 8% less likely to have concern about a new CEO’s ability to establish appropriate expectations or manage talent and culture.
They are 10% less likely to be concerned about his or her ability to set a new vision and strategy for the company, and even more starkly, are 12% less likely to be concerned about execution against that strategy than they would be if not confident in the CEO.
Finally, when investors are confident they are 11% less likely to be concerned about a CEO’s ability to improve the company’s financial performance. This is likely attributable to inertia – if you are confident in the company and its trajectory, it matters a little less who is at the helm.
Simply put, if an investor is more confident in the company, they are less likely to worry about the potential risks of the executive shift on the company.
The majority of investors look at a wide variety of sources when searching for information on an executive transition, and no one source is particularly dominant. Customers and business partners, along with industry analysts and other executives, are all top external sources that influence an investor’s opinion of a newly-appointed CEO. No doubt investors also look to information gleaned from initial meetings when forming their early opinions of a new leader.
There is risk in leadership change, even for those that appear orderly in nature. This risk is amplified by market pressures and investors who are increasingly taking a more active role in holding CEOs accountable to a well-articulated and more compelling long-term strategy and vision.
At the same time, the underlying dynamics of how CEO reputations are formed is rapidly changing. The traditional boundaries between stakeholders have fallen as information is more accessible and flows more seamlessly across stakeholders. No longer can CEO communications be parceled out by function – whether that is investor relations, corporate communications, or employee engagement.
As a result, companies and their leaders should consider the following if they want to successfully navigate leadership change:
Companies experience a broad variety of events, transactions and issues throughout their lifecycle – all of which can dramatically impact enterprise value. Smartly managing these critical inflection points can be the difference between success and failure in the eyes of investors, customers, the media and the public at large. FTI Consulting Strategic Communications’ Corporate Issues Study was conducted among more than 300 institutional investors worldwide, and takes an in-depth look at these critical issues through the eyes of the investment community.
In our two-part online series, we take a closer look at key unifying themes that emerge from our Corporate Issues Study, which is based on survey responses regarding M&A, Shareholder Activism, IPOs and Spin offs, CEO Transitions, Crises, and Regulatory Changes.
Throughout the survey, we also investigated the role that investor confidence plays when it comes to evaluating the six issues above. As data from FTI Consulting’s proprietary 2014 Enterprise Value Study demonstrates, confidence is the key to influencing behavior among employees, customers, investors, governmental leaders and the public at large. In fact, our research demonstrates that confidence is the key to driving action among stakeholders – employees to join or stay at a company, customers to buy products and services, investors to purchase and hold stock in the company, and policymakers and citizens to advocate for the company in their communities. The overarching takeaway, which will be borne out in our series: when investors have confidence in a company, that company receives significant breathing room to operate, particularly when faced with a critical event, issue or transaction.
To determine the impact of confidence on the perceptions and behaviors of investors, FTI Consulting developed a split sample survey approach whereby participants were randomly selected for two groups. This was done for each confidence related question. The questions posed to each group were identical with one exception: one group was asked to answer the question about companies they were confident in, the other about companies they were not confident in. Results were then compared and the differences (delta) between the means of both groups were calculated. Statistical analysis was then performed on the data to ensure that the differences were statistically significant at the 95 percent confidence level.