A mix of strategies, time, and the board’s support crucial for a new CEO’s outperformance: Deloitte India study

Mumbai, December 08: The appointment and transition of a new CEO often results in speculations and anxiety amongst investors and stakeholders. A study1 by Deloitte India that tracked a select few Nifty 50 companies over a 15-year period, concludes that while the occupant of the corner office significantly influences a company’s performance, the board too plays quite an important role in managing CEO transitions and helping them succeed in their role.

The study on ‘What sets outperforming CEOs apart and how boards can help’, analysed the financial performance of companies after the appointment of the new CEO.

“CEOs outperformed when they explored a mix of strategies developed methodically, and executed consistently, without losing sight of profitability and stakeholders’ interest”, said Kumar Kandaswami, Partner, Deloitte India. “The responsibility of boards does not end with choosing the right CEO. It also entails providing clarity on performance expectations in the short and long term, ensuring a smooth transition and giving CEOs the adequate time to implement the board’s vision”, he added.

Set clear performance expectations and give adequate time: Outperforming CEOs reached their peak performance much closer to the end of their tenure. They performed exceptionally from the start of their tenure to the end and reached their peak in about five median years. On the other hand, those who peaked between two-to-three years could not sustain performance thereafter. This suggests that establishing prudent short-term and longterm goals and deciding on the time horizon may prove to be critical to a company’s performance.

Strategy mix: The study highlighted a few distinct strategies that the outperforming CEOs pursued in the first three years of their appointment. The mix of strategies by outperforming CEOs had an equal emphasis on the engine room activity as well as on customer satisfaction and scale expansion, amongst others. Interestingly, apart from pursuing newer initiatives, outperforming CEOs continued with previous strategies of their predecessors that worked, without reinventing the wheel.

Building shareholder confidence: What stood out in the study was that most CEOs focused on the health of the company balance sheet. One of the priorities of outperforming CEOs was to impress shareholders of their ability to sustain growth by staying true to their winning strategies. They were able to improve the top line and bottom line. Most of the outperforming CEOs improved return on equity growth rate in net sales after adjusting for inflation, and profit margins.

Though most of the newly appointed CEOs, who took over after the resignation or removal of the outgoing CEO, turned out to be either laggards or modest performers after three years of their appointment. “Our study suggested that companies did not cope well with unforeseen and unplanned CEO changes”, said Kumar while adding that, “board governance can be an important factor in ensuring a well-planned and smooth transfer of a newly appointed CEO.”

CEO change: Frequent CEO changes reduced the company's potential to improve equity premium, thereby hurting shareholders’ long-term returns. The companies with fewer CEO transitions enjoyed more than twice the average premium CAGR of 3 percent as against those with frequent CEO transitions during this period. Stability and continuity of CEOs and their policies ensured higher returns and that probably explains why all outperformers were rewarded with a longer tenure (at least 60 percent more) than modest performers and laggards.

Services vs manufacturing: Most resignations or removals occurred in the services industry compared with the manufacturing industry. Services companies saw appointments of relatively younger CEOs. The manufacturing industry had a higher proportion of outperforming CEOs.

A breakdown of the CEO demographics suggested a strong preference for experienced executives appointed internally and skewed gender representation. One of the distinct observations from the study was that outperformers were appointed internally. This could be because a home-grown insider brings in more consistency and continuity due to better familiarity with the company's operations. The study also found that these outperforming CEOs were older by an average of 3.5 years than modest performers and laggards.

Notes to the editor for reference purposes only
This press release has been issued by Deloitte Touche Tohmatsu India LLP (Deloitte India).
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