Transitioning from one leader to the next can be a tumultuous and risky time for any company. The performance of the new CEO in the initial months is critical to his or her long-term success. The good news is that most CEOs are given a pass in the first six months by investors as they adjust to their new role. The bad news? After that, investors want results.
FTI Consulting recently completed a study exploring the risks and values associated with leadership changes. Researchers solicited feedback from 358 investment portfolio managers and analysts across 37 countries regarding 263 CEO transitions that occurred between July 1, 2007 and June 30, 2010. Of the transitions studied, 43% were unplanned resignations, both voluntary and forced, bankruptcies, restructuring, fraud, investigation, death/serious illness, and retirements.
Whether transitions are planned or unplanned, it’s clear that leadership change affects the enterprise value of a company. The study determined that whether or not the effect is positive or negative depends largely on measures taken by CEOs in the months following the change.
The study shows that after the new CEO is in place, the number one thing investors expect to see in the first six months is a clear vision and strategy, while managing talent is a distance second. Investors want the new chief executive to chart a path, but expectations for performance are relatively long term, mostly after the first year.
In early 2009, when Carol Bartz was named CEO of Yahoo!, she brought a big personality and a stellar track record from AutoDesk. In her three years with Yahoo!, she was never able to guide the company in a clear direction or produce positive results. The press mocked her ongoing inability to define Yahoo!’s core business strategy and in September 2011 she was finally replaced as CEO. When she came to the company in 2009, the stock was hovering at 12.50/share. When she left three years later, it closed at 12.91. Clearly, investor patience had run out.
Taking the reins as a new CEO is never easy, but to take advantage of the honeymoon and set the stage for success, there are six key actions every CEO must take soon after settling in to signal to investors, employees, and customers that he or she was a worthy of the job.
1. Draw a Map
It seems obvious, but establishing a compelling strategy that employees and investors can understand and get behind is critical. When Leo Apotheker became CEO of HP in late 2010, HP was in desperate need of strong leadership and a clear direction. Apotheker failed to provide either. HP’s strategy under his guidance was perceived as “rambling and unclear.” The company flip-flopped on its commitments to the tablet and personal computer businesses and as a result, share prices dropped 20% on a single day of trading in August 2011. A month later, Apotheker was dismissed. The company lost $30 billion in market capitalization during his eleven months as CEO.
2. Show Them a Clear Map
Lee Iacocca, who in 1979 saved Chrysler by asking for a federal bailout long before federal bailouts were in vogue, wrote in his book Where Have All the Leaders Gone?, “It always amazes me how big corporations will spend millions of dollars telling the public what’s happening, but forget to tell their own employees.”
3. Distribute the Map
CEOs must ensure that their direct reports not only understand and support the strategy but can communicate it themselves. Their direct reports in turn, must be able to do the same with their teams, and so on, all the way down the line. When a reporter asks a company vice president what the company’s strategy is, the answer should be the same as the one the CEO gives at a press conference. As Yahoo’s Bartz learned, there is nothing more attractive to the media than blood in the water—internal disagreement over company strategy.
4. Show Them the Map… Again
Repeat and report on the strategy, repeat it, and then repeat it again. Marketing experts have long debated how many times a message must be repeated before the subject takes action—three, four, seven—ultimately, all that matters is that repetition is key. Repetition is key. Repetition is key.
5. Get Out of the Office
Michael Geoghegan, the former Chief Executive of HSBC, took two weeks every summer to undertake a roadshow tour to as many locations as he could visit in a 15-day period. With 300,000 employees across the world, it was virtually impossible to visit every location, but by traveling to 18 major HSBC cities spread across all continents, staging town halls in large offsite convention centers and auditoriums, sometimes two in a single day, hundreds of miles apart, Geoghegan was able to stand in front of tens of thousands of employees, talk about his strategy and answer their questions. He didn’t reach every employee, but he tried, and his approval ratings among employees during his tenure showed they appreciated it.
6. Know Your Passengers
Iacocca and Geoghegan understood that achieving the company strategy was not just a matter of getting investors on board, it’s about the employees too.
A few years ago, when a Fortune 100 consumer brand wanted to reduce costs by closing facilities and trimming its real estate holdings, it meant moving hundreds of employees across town to its corporate headquarters, which already housed over 2500 workers. In announcing the move to the affected employees, the CEO repeatedly cited the perceived benefits of such a move—the long-term cost savings to the company, the value to shareholders and “increased opportunities to collaborate.”
There was no acknowledgement that the size of the cubicles at the facilities the company would be keeping would have to be reduced by two square feet to allow for the additional workers. Employees were furious. They were far more concerned about losing personal space than the company’s bottom line.
If more CEOs truly understood their employees and what is important to them and communicated to them in a way that makes that clear, the honeymoon and the bus ride would last a lot longer than six months.