Whenever there is a change of chief executive at a listed company speculation among journalists and analysts centers on what the new strategy will be.
At a time when few CEOs leave their posts entirely voluntarily, this is not surprising. Having often pushed for the change, shareholders want to know what the new appointee plans to do to improve their mood. What is surprising is that new CEOs can be slow to set out their intentions in public. It cannot be that they do not have any plans: presumably, a key issue in the selection process would have been what they intended to do with the organization. So it is curious that they do not do more to reduce the uncertainty that they must realize unnerves investors.
Whatever their reasons, research from Oxford University’s Said Business School may make them think twice about such reticence. The study of the effects on stock prices of more than 900 public presentations on strategy by the CEOs of leading U.S. companies revealed that new CEOs, especially those appointed from outside the organization, can see the stock price soar if they present their strategies to investors in their first 100 days. Overall, CEOs who do this within the first 100 days of their appointment can see stock prices rise by an average of 5.3% on presentation day (around $2.8 billion in market value). But for new CEOs appointed from outside the organizations the average stock price gains were 9.3% (just under $5 billion), while for those from outside the companies’ home industries the gains were even more pronounced, at 12.4% (or around $6.6 billion). This is the sort of lift and breathing space any new chief would surely welcome as they came to terms with their new role.
Richard Whittington, Professor of Strategic Management at Saïd Business School and one of the authors of the report, says: “Conventional wisdom has it that strategies are best kept within the organization and that any public presentations are likely to be dismissed as content-free ‘cheap talk,’ However, our research has shown that analysts and investors take them seriously, especially as a means of assessing new CEOs’ experience and competence. New CEO appointments are typically associated with strategic change, which means they set off a lot of investor uncertainty; the greater the uncertainty, the more sensitive the stock price will be to the presentations and to the timing of them.”
Nor does it appear that the presentations have to be especially detailed. In articles published in Strategic Management Journal and Harvard Business Review, Professor Whittington and his co-authors, Dr Basak Yakis-Douglas, Research Fellow at the Oxford Centre for Corporate Reputation at Oxford Saïd, and Dr Kwangwon Ahn, Assistant Professor at Peking University HSBC Business School, analyzed stock price responses to strategy presentations given by companies on the NYSE or NASDAQ exchange in the period from 1 January 2000 to 30 December 2010. These were general, forward-looking presentations talking about such strategies as internationalization, innovation, and diversification. Indeed, the researchers excluded announcements of actual events, such as acquisitions and presentations given the same day as earnings announcements or forecasts. By way of example of how a simple – and not too radical – plan can make a difference, they point to how in May 2015, just one week after his appointment as CEO of Chinese e-commerce giant Alibaba, Daniel Zhang announced his proposed “Let’s Go Global” strategy to his staff and the media. The strategy to expand its business internationally led to an immediate 1% rise in the company’s stock price (the equivalent of $2.2 billion), with further rises in the following days. In contrast, when Twitter co-founder Jack Dorsey returned to the role of CEO he admitted to investors that he didn’t yet have a strategy – and wiped $4 billion off his company’s stock value in a couple of days.
Yakis-Douglas says: “Given the generally positive response to strategy presentations, it is surprising that they are so little used. In our sample, substantially less than half of new CEOs carried out strategy presentations in their first 200 days and less than a quarter did so in their first 100 days. These proportions are even lower for outsiders and inexperienced new CEOs.” It is little wonder that he feels new CEOs should pay more attention to this means of communication. As he points out: “Given that the effects are greater within the first 100 days than the next 100, they should remember that, in this case, waiting doesn’t pay.”
By Roger Trapp
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