Is a CEO’s greater reputation a greater risk to the company he leads?

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2007-14 Share price Credit Suisse v Prudential

 

The news announced on March 10th that Tidjane Thiam CEO of Prudential PLC is to succeed Brady Dougan as CEO of Credit Suisse, was heralded by surprise in some quarters but received widespread enthusiasm from investors.  Credit Suisse’s share price shrugged off a poor recent performance in the markets by leaping 8% on the news, which translates as a $2.6 billion valuation for the new CEO.  Conversely, on the same day the Prudential’s share price slipped by 3% representing a $1.66 billion loss for the company.

Although Thiam isn’t a banker, his appointment follows a noticeable trend of banks appointing CEO’s from non-banking backgrounds, he joins Credit Suisse following a remarkably successful period at Prudential which has seen its share price double in two years, largely as a result of Thiam’s expansion into the Asian market.  As Thiam remarked about his departure from Prudential:

“The job of a CEO is not to stay as long as possible, it is to leave the company in a better shape than the one you received”

Clearly Thiam’s reputation as a highly effective CEO in his previous role has affected the sentiment of investors.  In addition the breadth of his experience from training as an engineer, working at McKinsey in the 1990’s before returning to his birthplace to join the Ivory Coast’s Government, being put under house-arrest during the military coup of 1999 and more recently running insurance businesses, lends the impression of a man who can adapt to survive. He has built a reputation that people trust.

However looking at the background and experience of a CEO are just pieces of the jigsaw: how much does the personality, ability and reputation of a CEO translate into value for the company he leads?

As Karsten Gessner observes in “the House of Value Creation”

“the image of a CEO can indeed enhance the value of a company continuously, as was evident in the case of Jack Welch at GE”

The word “continuously” asks the question:  Is a sudden spike in a share price following the appointment of a CEO any prediction of the future success of the company under his helm?

James Citrin’s article, “When naming a CEO ignore the market reaction” published in 2012 in The Harvard Business Review gives some hard numbers to this question.  He asks is the market reaction a meaningful barometer to that person’s future performance?  His study of 314 companies (2004-2009) who named new CEO’s gives some surprising numbers and insights.

In total 49% of Companies announcing a new CEO saw a first day share price rise.  Of those 55% also experienced along term gain.  Of 49% of Companies announcing a new CEO who saw a first day share price drop, 59% of these experienced a long term gain.   So far so good.  However, with 20 Companies who saw a stock price rise of more than 5% only 40% sustained a stock price rise over the tenure of the CEO.  Of the 14 Companies whose share price fell more than 5%, 79% of companies saw long term gains on their share price.

CEO's appointment - share price movements

How can this be?  Citrin puts the spotlight on Investors.  Investors have an imperfect understanding of challenges facing Companies, Investors have unrealistic expectations of their leaders.  Could the key also be in the CEO’s Reputation? Will such a CEO become too powerful?  Will he listen to his Board?   Is a CEO’s greater reputation commensurate with a greater risk to the Company he leads?

It will be interesting to see with Tidjane Thiam’s appointment whether he manages to create value for Credit Suisse, or if following last week’s big share price hike whether Credit Suisse , like 40% of the Companies surveyed by Citrin, fails to sustain a stock price rise during Thiam’s tenure.  The jury’s out.

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