Betting big on a new boss isn’t necessarily a mug’s game

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Highly paid bosses like to think they make or break a company’s performance. Investors — who are not averse to the all-powerful executive narrative — have been known to raise a stake in changes at the top.

The most recent example was, of course, Starbucks. Brian Niccol’s appointment this summer added a quarter to the stock price — or $20 billion in market value — as the man who turned around Chipotle restaurants was tasked with doing the same for coffee.

This is not the only recent case of euphoric market reaction to a C-suite change. International Paper rose 11% on the appointment of Andrew Silvernail in March. Jim Vena’s arrival at Union Pacific prompted a similar move last year. All of these are in Lex’s “top 10” of the biggest stock price increases in executive appointments for current S&P 500 companies since the early 2000s.

These reactions are easy to mock. After all, nothing has changed in terms of the company’s earnings or cash flow outlook. Conventional wisdom and underpaid subordinates assume that companies are about much more than the top person. An older academic study by the Harvard Business Review found that stock price movements on the day of the executive announcement had no predictive value for long-term performance.

But, at least occasionally, big moves in share price heralded serious value creation. Take the largest, in percentage terms. When John Barth took over engineering group Johnson Controls in 2002, the stock rose 45% on the day. This proved a good indicator for Barth’s tenure. The total shareholder return from the next day until Barth resigned in 2007 was about 160%, 70% more than the index.

The third-biggest jump came at Molina Healthcare, when Joseph Zubretsky replaced the son of the company’s founder in 2017. Molina’s three-year return (after the initial bump) was 178 percent.

For the top 10 companies where management change occurred before 2021, Lex calculates a three-year total shareholder return of 58%. This, of course, masks a wide range of results. Wynn Resorts shareholders bid shares down 9% when founder Steve Wynn resigned, but fell by a third over the next three years.

All of these are far from statistical significance. But the fact that change can herald volatility and perhaps performance makes intuitive sense. Companies tend to replace CEOs when things go terribly wrong. The new boss has a wide scope and a low bar to make a recovery from.

Not good for management egos. But the huge market reactions have as much to do with the failures of the old boss as the talents of the new one.

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