Sunsets – navigating unexpected CEO departures
Sunsets – navigating unexpected CEO departures
A good CEO can create vast amounts of shareholder value, and a Passenger who has stayed past their use by date can lose vast amounts of shareholder value.
An unplanned CEO departure, linked to the drift that can be caused internally and in strategic execution during a lengthy period of a company Lost and running without a long-term leader, can often be a driver of share price depression.
Fortunately for most Chairmen this is a once or twice in a career event. However, the playbook for handling this type of issue is not one size fits all and is something that requires deep thought and nuanced action to minimise shareholder wealth loss and keep all parties happy (something more important than it seems at first glance).
The effects are real
We’ve seen share prices Stumblin’ earlier this year on the announcements of CEO departures at various ASX100 companies. Orica (-18%, or ~$1.1b lost from their market cap) and Cleanaway (-8%, ~$450m), suffered significant share price reductions on their announcement days. Meanwhile, JB Hi-Fi (-4%, ~$230m), Oil Search (-5%, ~$150m) and AGL Energy (-3%, ~$160m) fell less sharply, albeit still with a significant impact on shareholder wealth.
“But surely these are just temporary reductions, waiting for a new long-term leader to emerge,” I hear you asking. This is, in part, true, although those that do not announce successors quickly can suffer a prolonged overhang on share price. Naturally, other factors bear on the price: AGL, which is juggling a demerger, is trading at 29% below pre-resignation levels, while Oil Search – juggling a merger with Santos – is 4% below. On the other hand, JB Hi-Fi and Orica, who appointed internal successors on the same day that the CEO’s resignation was announced, are currently trading at or above day-after-resignation levels (JB Hi-Fi only slightly below and Orica 6% above).
Preparation?
CEO succession planning is crucial to a smooth transition of leadership, but that is easiest when the incumbent has flagged their intentions to move on. In the real world that often is not possible – the CEO is poached to join another company or is ultimately responsible for the performance of the company, themselves, or their executives. Surprises happen, and they can swiftly derail even the best-laid plans. And when remuneration, shareholder wealth and reputation are on the line, all the ingredients are there to Give Board members significant headaches.
Complicating this further, the full set of skills needed to navigate a tricky CEO departure is seldom a core skill of the Chairman or the Board. It is also a potentially adversarial one, as the outgoing CEO will often wish to maximise their departure payments while the Chair and the Board are often left to pick up the pieces. In addition to a unique soft skill in people and conflict management, the exit will often require an understanding of the legal tightrope that must be walked in terms of termination benefits, continuous disclosure, employment law and restraints.
What to look out for
What might seem quite simple from first glance is often more complicated. When is a push a jump? When is a leaver a good leaver? Is resignation always a case that ends in the executive simply walking away?
Obviously, the first step is to determine a replacement, but even this often falls down the list in favour of scrambling to agree arrangements for the departing CEO.
These Days, the following are the critical matters additionally requiring attention:
The money – Already Gone are the days where a golden handshake is acceptable. With complex incentive arrangements usually on foot and a myriad of contractual positions and disclosures relating to the benefits to be provided on ceasing employment, it’s no longer a matter of Whatever Makes You Happy.
On the other side of the coin, a long and protracted fight with a former CEO is not in anyone’s interests.
Ideally, the treatment of incentives should be considered well ahead of time by ensuring that invitations and rules allow for maximum flexibility for the Board (and traditional drafting of these sections does not always allow for this). This becomes especially important if it is necessary to keep something on the line to help reinforce a restraint of trade or no poaching of employees clause, for clawback reasons and to ensure compliance with the separation deed.
In any event, getting comfortable with the treatment of the money is likely going to be the thing that is of paramount importance to the outgoing executive in these situations.
Optics – your thoughts will then likely drift to how this departure will be perceived. It is not in anyone’s interests, except the voyeurs, for dirty laundry to be aired. It can hurt the reputations of the executive and the Board and can harm the economic interests of shareholders. It is often better to focus on moving forward than looking in the rear-view mirror.
Externally, how will you message the departure to give a Glimpse into the reasons for the decision and provide comfort to shareholders and, critically, future investors? Can the blow be softened on announcement by announcing an internal promotion? A safe pair of hands on an interim basis? Or even providing positive guidance?
Internally, how will the executive team need to be engaged to ensure retention (especially if there is to be a reshuffling of the deck chairs and an executive has a mindset that they Don’t Wanna Be Left Out)? If so, when do they need to be informed (noting continuous disclosure obligations)?
Timing – somewhat tied into the point above is ensuring that the timing is agreed to be best for the company. While continuous disclosure will be triggered once the CEO resigns or is terminated by the Board, there is often a period of discussion and negotiation before this happens. There is nearly never a perfect time. However, if there is not a burning platform for change to happen overnight, what can be done to ensure an orderly transition? Is there an investor roadshow, a results announcement or major transaction that needs to be factored into timing? What is the market for talent like? How far along the succession planning path, both internally and externally, is the Board?
Documentation – then, once agreement has been reached on all of the above matters, they will need to be documented. A deed of separation is the start and there will of course need to be an announcement to the market, but there will also need to be consideration of how termination arrangements are disclosed in the remuneration report, or whether shareholder approval is needed for any termination benefits.
Takeaways
The reality is that, while infrequent, dealing with a CEO departure or two is likely throughout a Chairman’s tenure. Dealing with an unexpected CEO departure is also probable. When it does, there are always complex issues to work through, and as recent experience shows, it is a high stakes game.
While good Boards are generally prepared (even if not ready), with internal programs to develop future leaders and a watching brief on the external talent pool. However, when it comes to unplanned departures, it’s not always best to immediately tell a successor that We Should Be Together Now. Taking time to find your next Celebrity Head can often be beneficial because the exact situation of your company come crunch-time cannot be assured in advance… selecting the right person to lead the company after an unexpected departure is always going to come with great expectations.
The multi-faceted Solution, is to have an open ongoing dialogue at Board level about these issues, check in regularly with a longer serving (or under pressure) CEO , have your administrative affairs (eg incentive documentation) in order and keep leadership development and planning for succession on the front burner. That way, if the unexpected happens, Don’t Panic: you can take it Day by Day and avoid Fanning the flame.
And then once you have navigated the departure, the fun is only beginning as you turn your mind back to the small matter of running the company…