Communicating Critical Events: Communicating Critical Events: CEO - - PowerPoint PPT Presentation

Communicating Critical Events: Communicating Critical Events:

CEO Transitions and Risk to Enterprise Value

October 2011

FTI Consulting | Strategic Communications Practice

1

Objective

§ To explore the value-at-risk (VAR) associated with leadership changes, segmented based on the circumstances leading to the CEO transition.

Primary Research

§ FTI Consulting conducted primary research among institutional investors. In total , FTI Consulting solicited feedback from 358 portfolio managers and analysts across 37 countries. At 95% confidence margin of error is +/- 5.17%.

Secondary Research

§ FTI Consulting Global CEO Transition Study considered all CEO transitions among companies that had a market capitalization greater than $10B at any point during the time period of July 1, 2007 through June 30, 2010 – This resulted in 263 CEO transitions across 35 countries. § To determine the value-at-risk, the selected CEO transitions were analyzed based on net stock price performance relative to a comparable index commonly referred to as “alpha” (i.e., a positive alpha indicates the stock outperformed its benchmark index).

Global leadership transitions

Research objective & methodology

2

Profile of the Sample Population

Global CEO Transition Study

3

Significant turnover of large-cap company CEOs

*FTI Consulting’s Global CEO Transition Study considered all CEO transitions among companies that had a market capitalization greater than $10B at any point during the time period of July 1, 2007 through June 30, 2010 – This resulted in 263CEO transitions across 35 countries.

North America North America

102 CEO transitions 102 CEO transitions (36% of all N.A. companies) (36% of all N.A. companies)

South America South America

3 CEO transitions 3 CEO transitions (75% of all S.A. companies) (75% of all S.A. companies)

Eur Europe

• pe

62 CEO transitions 62 CEO transitions (23% of all Eur (23% of all European

• pean

companies) companies)

Asia Pacific Asia Pacific

44 CEO transitions 44 CEO transitions (34% of all (34% of all AsiaPac AsiaPac companies) companies)

B.R.I.C. B.R.I.C.

36 CEO transitions 36 CEO transitions (26% of all B.R.I.C. companies) (26% of all B.R.I.C. companies)

Middle East / Africa Middle East / Africa

16 CEO transitions 16 CEO transitions (48% of all Middle East/ (48% of all Middle East/ Africa companies) Africa companies)

31%

• f companies

announced a CEO transition*

43%

were unplanned, or not part of a succession plan

• f those

CEO T CEO Transitions ransitions

77%

came from within the company had no prior CEO experience

80%

and

New CEO Details New CEO Details

4

Importance of CEO reputation and its influence on investment decisions

Global CEO Transition Study

5

CEO reputation equals one-third of investment decision

0
%
 5
%
 10
%
 15
%
 20
%
 25
%
 30
%


None
 at
all
 10%
 20%
 30%
 40%
 50%
 60%
 70%
 80%
 90%
 100%


% of investment decision based on per % of investment decision based on perception of CEO ception of CEO

Average: 31.5%

Question: What percentage of your investment decision making process is based on your perception of the Company’s CEO?

§ The perception of the CEO influences almost one-third of the investment decision

6

CEO reputation as important as reputation of company

0%
 20%
 40%
 60%
 80%
 100%


Global
reach
 Culture
of
the
organiza:on
 Brand
equity
of
products/services
 Reputa:on
of
CEO
 Historical
reputa:on
of
the
company
 Strategic
direc:on
 Record
of
mee:ng
and/or
exceeding
expecta:ons
 Compe::ve
posi:oning
 Track
record
of
opera:onal
execu:on


Ranked
1st
 Ranked
2nd
 Ranked
3rd


Question: Which of the following factors has the greatest impact on shaping an organization's reputation within the investment community?

Key factors impacting an or Key factors impacting an organization’ ganization’s r s reputation eputation

§ The reputation of the CEO is nearly as important as the reputation of the company, and more important than the reputation of the company’s products or services

7

CEO transitions offer more risk than opportunity

0%
 10%
 20%
 30%
 40%
 50%
 Extremely
unlikely
‐
 2
 3
 Neutral
‐
4
 5
 6
 Extremely
likely
‐
7


Decision to Decision to sell sell stock stock

0%
 10%
 20%
 30%
 40%
 50%
 Extremely
unlikely
‐
1
 2
 3
 Neutral
‐
4
 5
 6
 Extremely
likely
‐
7


Decision to Decision to buy buy stock stock

39% 15%

§ There is more risk to the CEO appointment than opportunity § The propensity to sell shares because of the CEO is more than twice that to buy shares

Question(s): Under exceptional circumstances, how important is the CEO to your investment decisions making process? How likely would you be to buy a stock based solely on the CEO, when no other investment criteria are met? and How likely would you be to sell a stock based solely on the CEO, when all other investment criteria are met?

8

Investor assessment of a new CEO

Global CEO Transition Study

9

Investors first look to prior track record and former business associates to assess an incoming CEO

2%
 3%
 4%
 10% 18% 63%

0%
 10%
 20%
 30%
 40%
 50%
 60%
 70%
 Other
 Experience
at
a
similarly
company
 Experience
at
the
company
 Personal
reputa>on
 Industry
experience
 Track
record
of
execu>on
 Question(s): Prior to meeting a new CEO, which factor is most important to you in forming your initial opinion of him/her?To what extent do the following external sources influence your opinion of a newly appointed CEO? (Please rate the following on a scale of 1 to 7, where 1=No influence, 4=Moderate influence, and 7=Significant influence)

Key factors shaping initial opinions Key factors shaping initial opinions

27% 40% 50% 55% 69% 78% 27% 31% 24% 28% 18% 15% 47% 29% 26% 16% 13% 8%

0%
 20%
 40%
 60%
 80%
 100%
 Media
 Sell‐side
analysts
 Other
CEOs
 Industry
analysts
 Former
colleagues
 Customers
/
partners
 Significant
influence
 Moderate
influence
 LiFle
influence


Key external sour Key external sources shaping opinions ces shaping opinions

Avg. 5.35 5.05 4.53 4.39 4.05 3.47

§ The prior track record follows the executive to his/her new company and is far and away the most important factor for investors’ assessment of the new CEO

10

§ Industry and sell side analysts are also influential § The media have the least influence on shaping public

• pinions

§ The most influential stakeholders are those with whom the CEO did/does business with

Value-at-Risk in CEO transitions

Global CEO Transition Study

11

Enterprise Value at Risk Increases as Time Passes

Special situation

NEGATIVE α MODERATE standard deviation NEUTRAL α HIGH standard deviation

Resignation

NEGATIVE α LOW standard deviation POSITIVE α HIGH standard deviation

Succession / retirement

POSITIVE α LOW standard deviation POSITIVE α HIGH standard deviation

Announcement Six mo. post start

Time (relative to announcement date) Planned Unplanned

VAR: Value-at-risk NEGATIVE/NEUTRAL/POSITIVE α: average performance net of comparable indices for the circumstances and time period specified LOW/MODERATE/HIGH standard deviation: standard deviation of α for the circumstances and time period specified

The greater the element of surprise and the higher the potential risk of corporate strategy shifts, the more enterprise value at risk

Value-at-risk (VAR) landscape

§ Special situations, such as strategic transformations, bankruptcies/restructurings and fraud/investigations, presented the most value at-risk (VAR) of all transition types, over both time periods considered § Both voluntary and forced resignations demonstrated significant VAR § Succession / retirement situations resulted in limited VAR upon announcement § VAR increases over time for all transition types: more value is created /destroyed post- announcement, and depends on the actions and success of the new CEO

Enterprise value at risk increases as time passes

12

VAR by situation

Succession ¡/ ¡re,rement ¡ n=150 ¡ Forced ¡resigna,on ¡ n=35 ¡ Voluntary ¡resigna,on ¡ n=32 ¡ Strategic ¡transforma,on ¡ n=14 ¡ Fraud ¡/ ¡inves,ga,on ¡ n=15 ¡ Health ¡ n=10 ¡

• Misc. ¡crisis ¡

n=4 ¡

Transi'on ¡ announced ¡ Six ¡months ¡ post ¡start ¡ Transi'on ¡ announced ¡ Six ¡months ¡ post ¡start ¡ Transi'on ¡ announced ¡ Six ¡months ¡ post ¡start ¡ Transi'on ¡ announced ¡ Six ¡months ¡ post ¡start ¡ Transi'on ¡ announced ¡ Six ¡months ¡ post ¡start ¡ Transi'on ¡ announced ¡ Six ¡months ¡ post ¡start ¡ $0 ¡ ¡ ¡ ¡ ¡

• Avg. market capitalization change (B)
• Avg. market capitalization change (B)

$0.9
 $15.8
 ‐$11.6
 ‐$2.1


‐$30.0
 ‐$25.0
 ‐$20.0
 ‐$15.0
 ‐$10.0
 ‐$5.0
 $0.0
 $5.0
 $10.0
 $15.0
 $20.0


Bankruptcy ¡/ ¡restructuring ¡ n=3 ¡

Transi'on ¡ announced ¡ Six ¡months ¡ post ¡start ¡ Transi'on ¡ announced ¡ Six ¡months ¡ post ¡start ¡

§ Strategic transformation: VAR correlated to broader corporate change. Strategic transformations had highest negative alpha across all intervals, and 2nd highest potential VAR with unsuccessful transitions garnering an average $24B market cap erosion (-17% average alpha) six months post CEO start. § Company circumstances more impact on VAR than how CEO departs: Company-specific factors, such as fraud, regulatory investigations strategic transformations and restructuring/ bankruptcy, have more impact on VAR than how the CEO departed (e.g., resignation vs. succession)

Investor perceptions of risk also related to degree of ‘surprise’ and corporate change

5% 37% 40% 75% 24% 39% 33% 14% 71% 25% 27% 11%

0%
 10%
 20%
 30%
 40%
 50%
 60%
 70%
 80%
 90%
 100%
 Succession
/
 re7rement
 Voluntary
 resigna7on
 Sudden
departure
 through
death
or
 illness
 Forced
 resigna7on
/
 termina7on
 Significant
Value
at
Risk
 Moderate
Value
at
Risk
 LiHle
Value
at
Risk


Question: Under the following CEO transition circumstances, how much market capitalization do you believe is at risk? (Please rate the following on a scale of 1 to 7, where 1=No value at risk, 4=Moderate value at risk, and 7=All value at risk)

Value at-risk due to alue at-risk due to outgoing CEO

• utgoing CEO cir

circumstances cumstances

Avg. 5.07 4.16 4.10 2.82

§ Abrupt changes impact short-term enterprise value the most

14

Investor perceptions of risk also related to degree of ‘surprise’ and corporate change

50% 85% 85% 92% 32% 7% 11% 5% 19% 8% 4% 3%

0%
 10%
 20%
 30%
 40%
 50%
 60%
 70%
 80%
 90%
 100%
 Strategic
 transforma:on
 Bankruptcy
/
 restructuring
 Crisis
 Fraud
/
 inves:ga:on
 Significant
Value
at
Risk
 Moderate
Value
at
Risk
 LiKle
Value
at
Risk


Avg. 5.80 5.60 5.50 4.70

Value at-risk due to alue at-risk due to Company Company cir circumstances cumstances

§ Significant enterprise threats and transformations impact long-term enterprise value the most

Question: Under the following CEO transition circumstances, how much market capitalization do you believe is at risk? (Please rate the following on a scale of 1 to 7, where 1=No value at risk, 4=Moderate value at risk, and 7=All value at risk)

15

VAR is proportionate to situational urgency, but all instances present risk

41% 50% 57% 61% 81% 84% 36% 34% 29% 32% 11% 10% 23% 16% 14% 7% 8% 5%

0%
 20%
 40%
 60%
 80%
 100%


Pursuing
new
avenues
 for
growth
 Replacing
a
beloved
 leader,
industry
icon
 Addressing
changes
in
 the
compeBBve
 environment
 Leading
a
business
 transformaBon
 Turning
around
poor


• peraBng
performance


Managing
through
a
 crisis
(e.g.,
bankruptcy,
 restructuring)


Significant
impact
 Moderate
impact
 LiLle
impact
 Question: During the first six months following a leadership change, how much impact do the following factors have on enterprise value? (Please rate the following on a scale of 1 to 7, where 1=No impact, 4=Moderate impact, and 7=Significant impact)

Key factors Key factors

Avg. 5.62 5.44 4.85 4.64 4.54 4.26

§ The more challenging the situation, the greater the threat to the enterprise, the more value is hinging on the outcome

16

Management initiatives can reverse initial negative actions, in most cases

Succession ¡/ ¡re,rement ¡ n=150 ¡ Bankruptcy ¡/ ¡restructuring ¡ n=3 ¡ Fraud ¡/ ¡inves,ga,on ¡ n=15 ¡

• Misc. ¡crisis ¡

n=4 ¡

Transi'on ¡ announced ¡ Six ¡months ¡ post ¡start ¡ Six ¡months ¡ post ¡

• Avg. price performance (net of index)

Voluntary ¡resigna,on ¡ n=32 ¡

Transi'on ¡ announced ¡ Six ¡months ¡ post ¡start ¡

• Avg. price performance (net of index)

Transi'on ¡ announced ¡ Six ¡months ¡ post ¡start ¡ Transi'on ¡ announced ¡ Six ¡months ¡ post ¡start ¡

Health ¡ n=10 ¡

Transi'on ¡ announced ¡ Six ¡months ¡ post ¡start ¡

Strategic ¡transforma,on ¡ n=14 ¡

Transi'on ¡ announced ¡ Six ¡months ¡ post ¡start ¡ Transi'on ¡ announced ¡ Six ¡months ¡ post ¡start ¡

Forced ¡resigna,on ¡ n=35 ¡

Transi'on ¡ announced ¡ Six ¡months ¡ post ¡start ¡

17

Roadmap for a new CEO

Global CEO Transition Study

18

6% 7% 10% 12% 21% 29% 34% 46% 66% 68% 37% 31% 31% 19% 28% 48% 37% 33% 27% 23% 58% 63% 59% 69% 52% 22% 29% 21% 7% 9% 0%
 20%
 40%
 60%
 80%
 100%
 Improved
financial
performance
 Improved
market
performance
and
valua;on
 Mee;ng
stated
financial
objec;ves
 Mee;ng
stated
vision,
strategy
 Shaping
company
culture
 Alloca;ng
capital
and
resources
 Overseeing
execu;on
of
strategy
 Managing
talent
 Establishing
appropriate
expecta;ons
for
key
 stakeholders
 SeIng
vision,
strategy
 Short
Term
(<
6
Mo.)
 Medium
Term
(6
to
12
Mo.)
 Long
Term
(>12
Mo.)


There is a honeymoon period for new CEOs in the first six months to set vision, strategy and expectations

Question: Under what timeline do you expect to see traction / execution in the following functions?

Key functions and actions of a new CEO Key functions and actions of a new CEO

§ Expectations for performance are relatively long term (mostly after the first year) § Investors expect the new CEO to assess the situation, create the vision/ strategy and set expectations

19

New CEO’s effectiveness is measured by strategy execution and financial stewardship

8%
 3%
 9%
 80%
 0%
 50%
 100%
 Other
 Stock
performance
and/or
valua9on
 performance
 Financial
performance
 Execu9on
of
the
strategy


Most important measur Most important measures of ef es of effectiveness fectiveness

Question(s): Within the first six months following a leadership change, which of the following is most important when measuring the effectiveness of a new CEO? Within the first six months following a leadership change, which financial performance metric is most important to measuring the effectiveness of a new CEO?

27%
 10%
 11%
 24%
 28%
 0%
 20%
 40%
 60%
 80%
 100%
 Other*
 EPS
growth
 Revenue
growth
 Free
cash
flow
of
the
business
 ROIC
of
the
business


Most important financial metrics Most important financial metrics

*Most commonly submitted responses include: “6 Mo. Is too short to measure with financial metrics” and “situational dependent.” *Most commonly submitted responses include: “6 Mo. Is too short to form an opinion” and “outlining the strategic direction of the Company.”

§ CEO will be held to his/her strategy § Stewardship of the Company’s capital and assets is the most important financial measure of success

20

Investors take a multi-dimensional view of a new CEO

Question: During your initial interaction with a new CEO in their first 100 days, what do you look for to further establish your

• pinion of him/her?

54% 76% 88% 88% 88% 92% 96% 30% 19% 9% 9% 8% 6% 2% 16% 5% 3% 3% 4% 2% 2%

0%
 10%
 20%
 30%
 40%
 50%
 60%
 70%
 80%
 90%
100%
 Charisma
/
personality
 Leadership
style
 A
strategic
plan
 OperaBonal
focus
 Vision
 Knowledge
of
/
experience
with
industry
dynamics
 Grasp
of
the
company's
challenges
and
opportuniBes
 Significant
importance
 Neutral
 Limited
Importance


Key factors during initial interactions with new CEO Key factors during initial interactions with new CEO

§ Investors primarily look to see how the incoming CEO plans to take command of the company § A substantive grasp of the Company’s situation and plans for the future are very important § Vision and leadership style are also important in initial interactions

21

Research overview & methodology

22

The FTI Consulting Global CEO Transition Study considered all CEO transitions among companies that had a market capitalization greater than $10B at any point during the time period of July 1, 2007 through June 30, 2010 – This resulted in 263 263 CEO transitions across 35 35 countries. The CEO transitions were grouped and further analyzed by the following categories based

• n the circumstances leading to the transition:

§ Succession / retirement – orderly, planned CEO transitions that resulted from retirement scenarios; § Resignation – including: § Voluntary resignation – situations in which the departing CEO left to pursue other opportunities; and, § Forced resignation – situations where there was evidence of a termination or forced removal from office. § Special situations – including: § Strategic transformation – significant change in strategy or market position; § Bankruptcy / restructuring – bankruptcies or significant restructuring ; § Fraud / investigation – corporate scandal/wrongdoing or federal investigation; § Health – death or other serious illness that results in a CEO departure; and, § Miscellaneous crisis – other event-driven/unforeseen circumstance (e.g., natural disasters.)

Global leadership transitions

Research objective

The objective of our research was to explore the value-at-risk (VAR) associated with leadership changes, segmented based on the circumstances leading to the CEO transition.

23

To determine the value-at-risk, the selected CEO transitions were analyzed based on net stock price performance relative to a comparable index commonly referred to as “alpha alpha” (i.e., a positive alpha indicates the stock outperformed its benchmark index).

§ Stock performance was benchmarked against relevant comparable indices based on the country of domicile and local exchange (e.g., S&P 500, FTSE 100 Index, Nikkei 225 Index, Germany DAX Index, Paris CAC 40 Index).

Net stock price performance (alpha) was measured on two intervals:

§ Transition Announced (initial announcement of CEO departure) – measures the initial market reaction (one week prior to day of announcement) of the CEO change; one week was used to account for potential news leakage, global market time zones, etc.; and, § Six-Months Post Start (succeeding CEO starts) – measures the stock performance six months following the start date of the incoming CEO.

Each transition was further classified based on a number of characteristics to fully encapsulate the details of the situation including background of the incoming CEO and circumstances that lead to the transition.

Methodology

Secondary research

24

0.3%
 3%
 3%
 33%
 61%


South
America
 BRIC
 Middle
East
/
Africa
 Europe
 North
America


§ To further explore the value-at-risk associated with a CEO transition, FTI Consulting conducted primary research among institutional investors. § Using an online survey format, FTI Consulting solicited feedback from the investment community to better understand the extent to which CEO reputation in general, and leadership changes in particular impact investment decisions and therefore enterprise value. § The research was conducted globally, covering a cross-section of countries represented by the sample set. § In total, FTI Consulting solicited feedback from 358 portfolio managers and analysts across 37 countries. At 95% confidence margin of error is +/- 5.17%.

Methodology

Primary research – global investor survey Survey demographics – by r Survey demographics – by region egion

53%
 18%
 7%
 22%
 0%
 50%
 100%
 <
1B
 Between
1B
and
5B
 Between
5B
and
10B
 >
10B


Survey demographics – by Survey demographics – by AuM AuM

25

Contact: Elizabeth Saunders Elizabeth Saunders Americas Chairman, Strategic Communications FTI Consulting T: +1.312.553.6737 Elizabeth.Saunders@fticonsulting.com Bryan Bryan Armstrong Armstrong Managing Director FTI Consulting | Strategic Communications T: +1 (312) 553-6707 Bryan.Armstrong@fticonsulting.com David David Roady Roady Senior Managing Director FTI Consulting | Strategic Communications T: +1 (212) 850-5632 David.Roady@fticonsulting.com

26

Mark McCall Mark McCall Americas Head of Strategic Communications FTI Consulting T: +1.212.850.5641 Mark.McCall@fticonsulting.com