CEO Transitions I: Communicating Critical Events
CEO Transitions and the Risk to Enterprise Value
Leadership change affects a company’s enterprise value. Whether that’s positive or negative depends largely on measures taken by boards and CEOs in the months leading up to — and following — the change.
CEO change presents more downside risk than upside potential, with enterprise risk extending well beyond the point of transition. Further, there is more value at risk in unplanned CEO transitions. In particular, the greater the surprise and the higher the potential for corporate strategy shifts surrounding the transition, the more enterprise value is at risk. But the value at risk also increases over time, irrespective of the circumstances related to the transition. Recognizing this environment, boards and new CEOs must take action before, during and after a leadership change to carefully manage the risk inherent in a CEO transition while setting the agenda for the future.
To understand the risks in CEO transitions, the Strategic Communications segment of FTI Consulting recently studied the impact of CEO transitions on enterprise value. FTI Consulting also surveyed members of the financial community to learn how CEO changes affect their investment decisions, expectations and performance guidelines.
The study measures the actual enterprise value-at-risk (VAR) for a company during a CEO transition, taking into consideration multiple variables and scenarios surrounding the transition. In addition, the research explores the influence of CEO reputation on investment decisions and how investors assess an incoming CEO. The study also reveals what leadership teams can do to mitigate and manage risk to enterprise value during leadership changes.
The Strategic Communications segment at FTI Consulting conducted its global CEO Transitions study in the second quarter of 2011. The study considered all CEO transitions among companies with a market capitalization in excess of $10 billion at any point between July 1, 2007, and June 30, 2010. In all, the study identified 263 CEO transitions in 35 countries.
These CEO transitions were then grouped into three main categories: succession/retirement; resignations (both voluntary and not); and special situations, including bankruptcy, fraud, health, etc.
Also, to determine the value at risk, selected CEO transitions were analyzed based on their net stock-price performance relative to an index (e.g., alpha performance). The companies stock prices were benchmarked against relevant, comparable and country-specific indices, including the DAX, Nikkei and S&P.
FTI Consulting also surveyed portfolio managers and analysts to better understand the nature of investment risk presented by CEO transitions. In all, FTI Consulting surveyed 358 portfolio managers and analysts in 37 countries.
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