When private equity investors look at a business to buy into, they look first at the management team, then secondly at the management team, and thirdly at the management team. If there are ineffective or inexperienced directors at the helm, the level of risk may outweigh the potential return on capital.
The risk is compounded if there is a void in key board positions, due to the hiring, firing or illness of key executives.
When Jamie Dimon, chief executive at JP Morgan Chase, announced that he has throat cancer, the bank swiftly issued a memo to reassure shareholders that he will remain in the job and continue to run the company throughout his eight-week treatment process. The news leads stakeholders to question the bank’s succession risk and examine if it has done enough to ensure its leadership risk is mitigated.
CEO’s Wanted
There are leadership questions hanging over more than 10% of companies in the FTSE 100, including BG Group (LSE: BG), which has been without a CEO since Chris Finlayson left suddenly in April. The empty chair is being filled by BG’s chairman Andrew Gould until a successor is found. Gould has been keen to point out that “… one of my highest priorities is the recruitment of the new chief executive”. Analysts have clearly factored in the risk component and their consensus forecast has been downgraded in the last three months to neutral. BG Group’s first-quarter results for 2014 report total operating profit decreased by 6%, and the Group’s 2014 production is now expected to be at the lower end of the guidance range.
British Gas’s owner Centrica (LSE: CNA) also sees its chief executive, Sam Laidlaw, stepping down this year. Analysts have this company in a holding pattern with the share downgraded in the last few months; it now has an average rating of “Hold” and a consensus price target of £3.49.
Carpetright (LSE: CPR) has been without a CEO since the departure of Darren Shapland last year. The retailer is hoping the long-awaited arrival of its new CEO Wilf Walsh later this month will turn around its recent poor performance. It has issued a series of profit warnings, and pre-tax loss for the period to April was £7.2m, compared to a £5.1m loss the previous year. The share is trading at £5.08, down 16.94% on last year.
The National Association of Pension Funds (NAPF) has recommended that its members, who oversee about £900bn of investments, check boards’ leadership and succession plans. Will Pomroy of the NAPF, said: “With many companies becoming ever more global and complex, management succession is a primary shareholder risk in a number of circumstances.”
Despite recommendations from the Combined Code for boards to have a clear and defined succession legacy, in the form of designate deputy CEO’ or apprentice executives, there are still many companies ignoring the guidance.
