The Corporate Succession: How does CEO transition affect the company?
If you’ve seen the latest news, Tata Consultancy Services CEO, Rajesh Gopinathan stepped down from his role. The appointment of K Krithivasan as the new CEO designate has been announced. K Krithivasan will go through a transition period with Rajesh Gopinathan and will be appointed as MD & CEO in September.
Major changes in a company make stock investors jumpy. So how do the succession plans affect a company’s stocks?
A CEO transition will usually make a stock’s price more volatile in the short term, so a transition is well planned in advance. CEO successions are the common norm in a company; almost inevitable.
Hasty or Gradually?
When a CEO steps down from a company, it can have significant implications for the organization’s structure and reputation. If the departure is sudden, investors may assume that something has gone wrong and lose confidence in the company. To mitigate this risk, companies often announce a replacement or interim CEO at the same time as the departure is reported, signalling stability and continuity in leadership. Negative news tends to impact stock prices, whereas a competent CEO with an impressive portfolio makes investors feel secure.When Steve Jobs resigned as CEO of Apple Inc. in 2011, the company's stock initially fell over 5% due to concerns about its future without him. Click To Tweet
The stock price recovered in the following months as Tim Cook, Jobs’ successor, proved to be a capable leader. This shows how a CEO’s departure can impact stock prices, but the long-term effects depend on factors such as leadership succession planning and the company’s ability to stay competitive.
The Gossip Grapevine
Investors are fast to make their financial decisions based on the gossip grapevines, the information if a CEO is planning to leave or resign abruptly does not sit well with the investors.
This is where “Scuttlebutt Investing” comes in.
Scuttlebutt investing is an investment strategy that involves gathering information about a company through various channels such as industry contacts, suppliers, and customers to gain insights into its operations and future prospects.
Investors use this approach which proves to be particularly useful during a CEO’s transition period when there may be uncertainty and potential changes in the company’s direction. Investors can practice this approach by keeping these pointers in mind;
- Gather information from industry contacts: Reach out to people in the industry who may have knowledge or insight into the company and its new CEO.
- Monitor news and press releases: Keeping an eye on any news or press releases related to the company and its new CEO.
- Analyzing the CEO’s track record: Look into the CEO’s past experience and track record in previous roles. This can give you an idea of their management style and whether they have a history of success in turning around struggling companies.
- Reviewing financial statements: Analyze the company’s financial statements to get an idea of its financial health and any potential risks or opportunities. Look for any changes in the company’s financials that could be attributed to the CEO’s transition.
- Attend company events: Attend company events or investor meetings to gain insights into the company’s operations and future prospects. This can also give you an opportunity to ask questions and gather information from company executives and other investors.
Overall, scuttlebutt investing during a CEO’s transition can be a valuable strategy for gaining insights into a company’s operations and future prospects.
The Psychological Drama
A transition is not just about numbers and business as usual, ignoring the psychological power play is inevitable. A leadership change may trigger a number of changes that the people associated with the company must deal with.
Loyalty shift is a quick way subordinates deal with change. New power networks spring up, and subtle changes in relationships occur, apart from the number, a CEO transition changes the psychological dynamics as well.
Remembering Shakespeare’s King Lear, a famous play which lays out the theme of power struggles and the consequences of poor leadership decisions.
In King Lear, the titular character’s decision to divide his kingdom among his daughters based on their declarations of love leads to a power struggle between them and ultimately results in chaos, betrayal, and tragedy. Similarly, when a CEO/ the board fails to plan for an orderly succession or makes poor decisions in choosing their successor, it can lead to power struggles, turmoil, and even the downfall of the company.
Careful consideration and the execution of power play are a must for any CEO who’s handing over the reins.
The succession initiates a period of change when the status quo gets disrupted. The new CEO needs to tackle the people who still romanticise the past. People have to sort out many changes and ambiguities, and these uncertainties make them long for direction and leadership. This makes the CEO’s role seem symbolic, a person who is now supposed to solve all problems.