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Highly paid bosses like to think they make or break a company’s performance. Investors — not averse to the narrative of the all-powerful executive — have been known to froth up a stock on changes at the top.
The latest example was, of course, Starbucks. Brian Niccol’s appointment this summer added a quarter to the share price — or $20bn of market value — as the man who turned around Chipotle restaurants was tasked with doing the same for coffee.
This is not the only recent case of a euphoric market reaction to a C-suite change. International Paper rose 11 per cent on Andrew Silvernail’s appointment in March. Jim Vena’s arrival at Union Pacific prompted a similar move last year. These all make Lex’s “top 10” list of the largest share price jumps on executive appointments for current S&P 500 companies since the early 2000s.
These reactions are easy to scoff at. After all, nothing has changed in terms of the company’s earnings or cash flow outlook. Conventional wisdom and underpaid underlings posit that companies are much more than the person at the top. One older academic study, by Harvard Business Review, found that share price moves on the day of the executive announcement lacked predictive value for longer-term performance.
But at least on occasion, big share price moves have heralded serious value creation. Take the largest, in percentage terms. When John Barth took over engineering group Johnson Controls in 2002, the stock jumped 45 per cent on the day. That proved a good indicator for Barth’s tenure. Total shareholder returns from the following day to when Barth stepped down in 2007 were about 160 per cent, 70 per cent more than the index.
The third-largest jump came at Molina Healthcare, when Joseph Zubretsky replaced the son of the company’s founder in 2017. Molina’s three-year return (after the initial bump) was a staggering 178 per cent.
For the top 10 companies where the management change occurred before 2021, Lex calculates a three-year total shareholder return of 58 per cent. This, of course, masks a broad range of outcomes. Wynn Resorts shareholders bid up the stock 9 per cent when founder Steve Wynn resigned, but it fell by a third over the next three years.
All this is a long way from statistical significance. But the fact that change may herald volatility, and perhaps outperformance, makes intuitive sense. When things go very wrong, companies tend to replace CEOs. The new boss has a wide remit and a low bar from which to stage a recovery.
It is not good for management egos. But outsized market reactions have as much to do with the failings of the old boss as the talents of the new.
andrew.whiffin@ft.com
camilla.palladino@ft.com
https://www.ft.com/content/239a0c13-a597-47ec-8c63-0d3b2e30bd29
