Issue 6 - December 2011
CEO transitions - continued
During the CEO’s second six months, investors expect to see evidence that the strategy is being executed successfully (see chart below). To stay ahead of investor expectations, a CEO should carefully set the expectations against which he or she wants to be measured. Then the CEO can begin to meet stated financial objectives, improve the company’s financial performance, and boost market performance and valuation over the ensuing 12 months, which is in line with investor expectations. Also, in evaluating performance success, the study reinforced the principle that the investment community values metrics associated with stewardship of capital and cash flow, such as return on invested capital and free cash flow, far more than bottom-line metrics such as earnings per share and net income.
The high value of good communication
For a new CEO, communicating effectively with all stakeholders is critical to managing risk and its impact on a company’s enterprise value. While communications are important at any time of major change, they are especially vital during a CEO transition.
How to communicate effectively? New CEOs should begin by listening to the market. For example, CEOs can conduct research to gauge perceptions and test company messaging. This can help them identify any gaps between what the company says and what its stakeholders actually hear. New CEOs also need to have a well-honed corporate narrative to tell the company’s new story. To achieve this, a CEO should develop a comprehensive communications strategy that is linked closely to his or her vision and strategy. This may involve the development of appropriate messages and channels for different groups, according to what will best reach and persuade them. For example, at The Coca-Cola Co., CEO Muhtar Kent has made a point of communicating his strategy and other changes through new channels to better engage with the company’s workforce, especially those based outside its headquarters. Kent does so, in part, by conducting town halls at bottling facilities and sending text messages to workers’ mobile phones, as many employees of Coca-Cola cannot readily access e-mail, video or other means of communication during the workday.
Also, while many companies focus their communications efforts on the media, the FTI Consulting survey indicates that it is not a terribly influential constituency for investors. When investors were asked for the key external source shaping their opinion of a company, only 27% named the media, far less important than those much better placed to judge the capabilities of an executive, such as customers, business partners and former colleagues (see chart, opposite page).
Call to Action
Because CEO transitions create a potential risk for enterprise value, all companies should make CEO succession planning an integral part of their riskmitigation strategy. At the same time, companies should be aware that CEO succession planning cannot take into account all factors that affect stock value.
When announcing a CEO succession plan, the board should also emphasize the CEO candidate’s track record of execution. Again, this track record is by far the most important factor for investors. Industry experience and personal reputation are a distant second and third.
Once the new CEO is in place, he or she should align the organization by communicating with stakeholders, establishing credibility and setting reasonable expectations among stakeholders.
To protect share value, all companies should remember that surprises increase risk. Therefore, boards should strive to create CEO transitions that are both smooth and well thought out. A CEO’s planned retirement, for example, involves far less risk than a forced resignation. But even when a CEO transition hurts the stock price in the short term, the right management initiatives later can often restore value over the long term.