Is there any systematic way to tell if a change in top leadership will help or hurt in the long run?
Academics who have studied the impact of hundreds of CEO changes say there are a few key factors investors should consider. According to University of Maryland assistant professor Cristian L. Dezso gleaning useful guidance requires a sophisticated analysis. After reviewing 1,329 CEO changes at major companies from 1980 to 2000, he found that the setting was as important as the change. A key variable was whether companies had erected anti-take-over defenses such as poison pills or staggered board elections. In instances where takeover defenses were extensive, the forced departure of a CEO led to significant outperformance by the company over the following three years.
When a company is harder to acquire, there is less pressure on management to improve results, Dezso explains. "If a CEO and board of directors implement these kinds of provisions, the disciplining force coming from outsiders is reduced." But when management-friendly board forces a CEO out, it shows that enough pressure for improved performance has developed within the company, leaving an opening for the new CEO to have a big positive impact.
University of Michigan professor E. Han Kim looked at the question form a slightly different angle. He focused on a CEO's hold on the top job. He rated chief executives on three sources or merit, and corporate structures, like stacking the board of directors with friends. CEOs who held on to power thanks mainly to structural advantages hurt the company performance, but those who gained stature through their abilities improved the company. CEOs who owned more than 25% of a company's shares tended to hurt performance.
Such results should help shareholders decide whether to flee or stay when a CEO leaves, Kim says. His paper, "Is CEO Power Bad?" which includes yardsticks for measuring structural and ability-based staying power, can be found on Kim's page at the University of Michigan's website.
Source: BUSINESSWEEK, May 11, 2009