Market Update - What difference does a CEO make to share prices?
What difference does a CEO make to share prices?
There has been plenty of debate over the importance of CEOs to corporate performance. On one hand, there’s a view that the whole C-suite (as in board-level senior executives) are little more than overpaid middle managers who seldom contribute to the overall success of the company’s business. Instead, they spend most of their time organising share buybacks and indulging in other financial machinations to ensure a maximum return on their options packages. Other commentators insist that the Chief Executive and his team perform a vital function in guiding the fortunes of the corporation and keeping several steps ahead of the competition. In addition, such observers insist that a thorough knowledge and understanding of the people at the top of any business is a vital aspect to fundamental analysis. They argue that it is the management’s corporate strategy which drives the fortunes of the company by making sure it is correctly positioned to flourish in all economic weathers.
Short or long term
The truth is probably somewhere in the middle, with examples of both extremes either side of the hump of the probability bell curve. But when directly addressing the title of this blog, ‘What difference does a CEO make to share prices?’ there’s rather an obvious answer. If, as an investor, you’re looking for short term share price growth, then you want to back those CEOs who surround themselves with a top team that concentrates on financial engineering. That’s a much more immediate way of giving shareholder value. After all, what CEO wants to spend years building a company organically, frittering away profits on costly and risky projects such as R&D, new plant and machinery, staff training and the like? Your investors will love you more if you plough those profits back into the company through stock buybacks. And don’t worry if you haven’t got any profits, why not take on a load of debt (it’s very cheap currently) and buy up your shares with that instead?
There’s little doubt that the latter style of corporate management works very well in the ‘good’ times, that is when borrowing costs are low. But what about when interest rates start to rise? In the past we’ve seen how the big boys get bailed out when trouble comes along. But it’s fair to say that many badly managed, debt-laden companies that survived the years since the Great Financial Crisis thanks to low interest rates, may suffer the consequences once the cost of borrowing goes up. They also leave themselves vulnerable to hostile takeovers, where the core elements of the business are kept by new owners while the rest is ditched.
CEO and the share price
But what about the CEOs themselves? What happens when they step down, or depart involuntarily? There are some big egos out there, and most would like to believe that their companies can’t survive without them. But investors vote with their wallets, so here’s some share price moves following some big corporate departures:
Top of the list must be the founder and CEO of Amazon, Jeff Bezos, who announced his resignation as the company’s chief executive on 2nd February this year. He’s continuing as an ‘executive chair’ which means he’s keeping a close eye on the company, while giving himself time to engage with other initiatives. The news was unexpected. The stock price fell 12% over the next five weeks before rallying to a fresh record high two months later. Currently Amazon is little changed from where it was trading when Bezos resigned. So, either investors aren’t fussed by Bezos’s departure, or they’re confident he’s still exercising control over his baby.
It must be pretty galling for a CEO if your company’s share price rallies after you leave. That was the fate of Jeff Immelt when he announced he was stepping down from GE. The stock jumped 5% on the day. Investors were happy to see the back of Mr Immelt, blaming him for a near 30% decline in GE’s stock price during his tenure, while the wider market had more than doubled over the same period. Whether it was fair to blame Mr Immelt or not, the market certainly blew him a raspberry. But sometimes it doesn’t matter who you CEO is. GE was trading at around $21 when Mr Immelt left in October 2017. It’s barely above $13 today.
Leaving under a cloud
Of course, the way a CEO leaves can be critical to how the stock price subsequently behaves. Back in 2015 the stock price of McDonald’s rallied sharply after it was announced that Steve Easterbrook would replace Don Thompson as CEO. Fast forward to November last year and it was Easterbrook who was shown the door. Mr Easterbrook was accused of violating company policy by engaging in an intimate relationship with an employee. Things have gone from bad to worse with the former CEO now accused of lying and potential fraud. The stock fell around 5% between November 2020 and January this year. But the shares are currently 8% higher than they were when Mr Easterbrook departed, suggesting that investors are perfectly sanguine about the whole affair. Although the possibility that McDonalds may recover the ex-CEO’s $42 million in pay and benefits could help to some degree.
Starbucks had four stores when Howard Schultz joined in 1982. Mr Shultz went on to buy the company in 1987 and drove its expansion to the point where the company became a household name with tens of thousands of branches worldwide. Mr Schultz was synonymous with Starbucks, so perhaps investors were right to be nervous when he stood aside from the company in June 2018. The stock fell from $55 to just over $47 in the space of a week, but subsequently recovered. Starbucks is currently trading around $112 and just shy of its all-time high.
Steve Jobs is another CEO who was seen as indivisible from the company he founded. Regrettably, it was ill-health that forced Mr Jobs to retire from Apple back in 2011. He was considered irreplaceable by many investors who saw him as not only the genius that he undoubtedly was, but also as a visionary whose legacy couldn’t be bettered. So, it looked like his successor would be on a hiding to nothing. Indeed, Apple’s stock price fell around 5% to just over $50 following his departure. But since Tim Cook took over as CEO, Apple has continued to be a major holding for investors, and the shares hit a high of $145 earlier this year.
Of course, the one thing all these companies have in common is that they are amongst the largest in the world. They are well-established with solid business models and their success, or failure, is always going to be bigger than one man. Investors want to own these stocks and share in these companies’ fortunes. But significant failures do occur, and often these are blamed, rightly or wrongly, at the door of a single individual. Remember Dick Fuld of Lehman Brothers, Kenneth Lay of Enron, and Bernie Madoff? These guys are a reminder that investors would be wise to carry out all due diligence and check out the person at the top. Unfortunately, there’s no guarantee that you can always spot a wrong ‘un.