Finance

Life at the top gets harder for chief executives

Succession is quite the topic these days, and not only because the unmissable HBO series of that name is nearing its finale. While the Murdoch — oops, I mean Roy — siblings duke it out for dad’s media throne, in the real world Zara heiress Marta Ortega has taken the helm at Inditex, the Spanish fashion conglomerate. Meanwhile, quirky tech titan Jack Dorsey is stepping down as chief executive of Twitter to focus on leading Square, his fintech firm, as Parag Agrawal, chief technology officer, takes his place at the social media giant.

Presumably the new arrangements will give Dorsey not only more time to think about cryptocurrency, but also more headspace for those afternoon yoga classes that activist investor Paul Singer must have loathed. Singer’s Elliott Management had pushed for Dorsey’s removal on the grounds that nobody should be leading two public companies. It might also be a signal of a larger exodus from the C-suite, as conditions in both the markets and the real economy get tougher, and leadership of big public companies becomes harder.

One could argue that’s been the case for the past two years, of course. During the first part of 2020, when the pandemic began, boards wanted to keep CEOs in place because of Covid-19. But the number of transition announcements has picked up considerably from the second half of 2020, according to a study of the Russell 3000 and the S&P 500 co-authored by the Conference Board earlier this year. Corporate leaders cited increased levels of “burnout after a tumultuous and exhausting year of crisis management”, as the report’s authors put it.

This trend may be reflected in the fact that the gap in succession rates between worse and better-performing companies, which is usually quite large, narrowed significantly. The rising numbers of departures seem to be as much about top executives staggering away from their jobs as being pushed out of them.

It may get worse. Even before the pandemic, the depth and breadth of digital transformation was creating one of the most dynamic but also most challenging business environments in memory. Add to that new worries about employee health and wellbeing, the reliability of supply chains, changing consumer behaviour, labour activism, inflation and the Federal Reserve’s emerging shift from easy monetary policy, and you have the makings of an unusually demanding year ahead.

What’s more, a coming wave of mergers and acquisitions is likely to create its own redundancies in the C-suite. The number of public companies has been shrinking for nearly two decades. According to OECD data, there are 30,000 fewer firms now than in 2005. A new Schroder’s report notes that of the 977 companies in the US that delisted since 2010, 84 per cent did so because they were bought by other companies.

As Schroder’s head of research and analytics, Duncan Lamont notes: “A boom in company takeovers has been gathering pace for a number of years. But the party may have only just begun. The conditions are perfect for a further surge in M&A activity: many companies are flush with cash, private equity ‘dry powder’ is close to a record high (money raised but not yet invested) and borrowing costs are historically low.”

All this could provide a bit of a kick for stocks — M&A waves, like share buybacks, usually do. However, it will also lead to consolidation, which will inevitably lead to new successions.

The CEOs that are left standing will have their hands full. The Fed tailwinds that have kept share prices high for so long are now changing, with Jay Powell, the central bank’s chair, indicating that both tapering and rate hikes might come sooner than expected. That’s a good thing, as it will take froth out of the markets. But it won’t be good for profits. Neither will the inflation we are seeing in both goods and labour.

Meanwhile, as markets shift, corporate leaders will probably come under pressure on all sides. In the first place, activists like Elliott will undoubtedly demand more belt tightening. But there will also be pressure from unions, which are enjoying a resurgence, from governments looking for more and better environmental, social and governance commitments and from everyone else with a vested interest in “stakeholder” rather than “shareholder” capitalism.

Judging success on something aside from share price is, of course, a good idea. But there’s still no clear agreement on what the new metrics of corporate performance should be — although governments and regulators on both sides of the Atlantic are trying to come up with ideas. That’s tough for business leaders.

But while metrics may be fuzzy, CEOs are already being evaluated by the market not just on earnings targets, but on how they articulate values, tackle inequity, manage talent, organise supply chains, affect the environment and engage with employees, customers and local communities.

Indeed, the Conference Board study authors speculated that this may be another reason for the sharp reduction in the gap between CEO succession rates of better and worse-performing companies. As the study noted, it’s possible that “factors beyond stock market performance are starting to weigh more prominently” in a board’s decision whether to retain a CEO.

The fictional Roys aren’t the only ones dealing with scandal, share prices and succession. By choice or force, more executives may soon have more time to perfect their downward dog.

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