An FTI Consulting poll of more than 300 investors reveals a timeline of expectations when a new leader takes over the top spot.
hen Rex Tillerson resigned his position as CEO of ExxonMobil in December to begin the vetting process as Secretary of State in the new Trump Administration, the change highlighted a busy year of CEO turnover. FTI Consulting has determined that in the 12-month period ending in December 2016, 11% of U.S. CEOs left their positions.
As the Tillerson example demonstrates, a variety of events, transactions, and issues can lead to CEO change. A new leader at the top can signify a shift in business strategy for instance, but it can also indicate a loss of faith among the Board of Directors in executive leadership, or even a crisis or public scandal. Regardless of the reason, a change in C-Suite leadership is one of the most critical any company can make.
FTI Consulting conducted a survey of more than 300 institutional investors late last year to see how they evaluate CEO transitions. We found that investors begin to shape their opinions of a new executive long before he or she ever executes on a strategy. Prior to a first meeting, for example, 78% of investors indicate that a proven track record goes the farthest towards forming a favorable opinion of the newcomer. Other favorable influences include the CEO's personal reputation and relevant industry experience — but not necessarily experience at the very company in which he or she is assuming command. In fact experience gained at the company itself was seen as least important, perhaps indicating that investors are often excited about “new blood” in the C-Suite at the company.
According to our study, when a company handles the CEO transition well, three key elements contribute to the newcomer’s success: setting a new vision or strategy; executing on that strategy; and improving overall financial performance. Additionally, investors characterize a successful CEO transition by the incoming leader’s ability to demonstrate progress against a timeline of strategic milestones during his or her first few years in the position. Those milestones, derived from the survey, read like a de facto to-do list for a new CEO.
✓ Engage shareholders
✓ Set appropriate capital and resource allocation
In the first 90 days, investors are busy with due diligence — that is, reviewing the new CEO’s prior track record in expectation of a first meeting with the new leader. While investors don’t expect all the answers to be laid out at this early stage, they want to make sure the CEO has a firm grasp of the company’s current situation and detail how he or she will approach challenges. Companies should develop a plan for CEOs to engage with top shareholders and the sell-side community. Prior to that engagement, CEOs can be prepped through presentation and Q&A training — a technique especially helpful for CEOs who may not have much experience in this area.
✓ Setting Vision & Strategy
✓ Establishing Expectations for Key Stakeholders
After six months, a CEO will have formed his or her opinions and should be ready to outline a vision. An observant CEO will use this transitional period as an opportunity to reset the pace and context of communications. Hosting an investor day is an effective way of rewriting the narrative and introducing both personal and company goals.
✓ Allocating Capital and Resources
✓ Managing Talent
A new CEO may also bring personnel changes; managing these decisions is critical to leadership. CEOs seek to lead diverse, unified teams of professionals who not only understand the many challenges of today, but are prepared for the obstacles of tomorrow. CEOs should create a clear plan to engage current employees as to retain and maximize key talent. Staffing decisions a CEO makes will help fill the gaps in company culture while providing insights for stakeholders into the company’s strategic direction.
✓ Overseeing Execution of Strategy
✓ Shaping Company Culture
At this point a new CEO should be demonstrating operational competence, executing on his or her goals and aligning actions with the strategy laid out. While communication plays a big role in these efforts, there is a larger picture to consider as well: getting the job done. To assess the effectiveness of the CEO’s actions, particularly by audience, multi-stakeholder research can be conducted across key groups to further align and identify gaps in the organization’s culture.
✓ Improved Financial Performance
✓ Improved Market Performance and Valuation
After 15 months, investors expect traction on key goals. What initiatives have been implemented and have they been successful? Has the plan that was laid out been properly executed? It’s one thing to issue marching orders but it’s another to have them followed. Highlighting key wins is important in a CEO’s second year, but it can be equally important to provide insight on lessons learned from losses. Clearly articulating the momentum of the current direction and earnestly discussing the inputs to the business builds trust with investors that lead to sustained improved valuation.
✓ Meeting Stated Financial Objectives
✓ Meeting Stated Vision, Strategy
Framing accomplishments can set the tone for building additional confidence. CEOs should reflect on their achievements with both internal and external audiences, focusing on the context of their expectations for future performance. This ties together both past results and future milestones.
Going forward, CEOs must remain disciplined in setting a timeline for strategy, while keeping in mind the vital role that communication plays in linking the ability to outlay, and execute, that strategy. But it’s also important to realize that, like the Tillerson example, each CEO transition is unique unto itself. For that reason, the value of research to gather an informed vantage point, particularly with the investment community, cannot be understated.
This article appeared in CEOWORLD Magazine online on April 6, 2017.