The famous Queen song was part of their 1980 album, The Game. It feels a fitting anthem for the way FTSE 100 CEOs are falling in 2023, and how c-suite positions can also be seen as part of a game. The FT reported in mid-September that with already 18 departures this was the second highest annual total since 2000, with three months still to go. Roll on one week and the resignation of Pearson’s CEO added to the tally.
Among our portfolio holdings we have seen some major CEO arrivals and departures among UK companies. In January alone, we had three new CEOs begin their tenure, Wael Sawan at Shell, Margherita Della Valle (Interim) at Vodafone and Mark Irwin at Serco. After a period of calm (linked to semi-annual reporting), casualties started to mount in July… Alison Rose resigned from NatWest Group (following the Coutts/Farage controversy and leaks to the BBC) and was replaced by Paul Thwaite (on a 12-month contract); Jon Lewis resigned from Capita (after a bruising 6 years trying to turn the company around); and BT Group announced that Philip Jansen would step down in early 2024 (before completion of his multi-billion investment into fibre networks). The attrition continued into September: Bernard Looney resigned from bp (following allegations of misleading the bp Board on past relationships with colleagues), replaced by Murray Auchincloss (interim) and Andy Bird announced his retirement from Pearson (after three years “Andy feels now is the right time to hand the reins to a successor”) with Omar Abbosh as a replacement.
Other notable changes across the market include a new CEO at Unilever, Diageo, British American Tobacco, Reckitt Benckiser, Rolls-Royce, Prudential, Whitbread, St James’s Place, Rightmove, RS Group, Halma, Hargreaves Lansdown and United Utilities.
Without going into the rights or wrongs for individual departures, this is deeply frustrating. We have lost some very capable executives. Management change can often be a good thing, when a company needs to change strategy or make decisions that incumbents are too behaviourally compromised to make. However, when a company has set the course, what is needed most is focus, implementation and execution. We believe a company does not need the distraction of change at the top, the drift between appointments with lame duck CEOs or interim caretakers, followed by a new CEO bringing management changes so as to bring in their own people, or thinking they must make their mark by changing course on strategy… that is not to mention the tendency to ‘kitchen sink’, getting as much bad news out at the beginning of a tenure, while laying the blame with previous management. This enables a reset of expectations and usually leads to a lower share price to the benefit of the incoming CEO’s future reputation and remuneration. None of this supports long-run value creation for shareholders, or any stakeholder for that matter, save a small cadre of triumphant executives.
Indeed, a Deloitte study in 2021, What sets outperforming CEOs apart and how boards can help, proved what is intuitive, as the results “showed that frequent changes in CEO reduced the company’s potential to improve the company’s equity premium, hurting shareholders’ long-term returns. The companies with fewer CEO transitions enjoyed an additional average [share price] premium CAGR of 1.5 percent against companies with frequent CEO transitions during the period. Stability and continuity of CEOs ensured higher returns.”
To change this behaviour is a challenge; we encourage longer term thinking, and longer tenure among portfolio companies by asking remuneration committees to introduce longer-term incentive plans for management executives. These proposals include, for example, having longer ‘performance periods’ for shares received as part of remuneration awards, particularly for awards received in the early years of a CEO’s reign. Here we get a lot of push back, with many companies gravitating to the minimum recommended by the IA Principles of Remuneration “which should be no less than three years”, ignoring the rest of the statement which reads “and shareholders would generally prefer longer”. One of our recently retired CEOs has left two years into his five-year strategic plan for the company, leaving the market to wonder what now happens to that plan and the associated targets, a strategy in limbo.
There seems no prospect for a change in this behaviour, I fear we will continue to see CEOs biting the dust much too often.
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