Do Investors Need A Re-Look At Portfolios On CEO Transition?

Jefferies said the Covid period saw chief executive officer (CEO) transitions take a back seat, but businesses are now dealing with changed macro and geopolitical situations, and many CEO changes are in the offing.

Over the next 12 months, CEOs of several large corporations -- Kotak Mahindra Bank, State Bank of India, Hindustan Unilever Ltd., Tata Consultancy Services Ltd., ICICI Prudential Life Insurance Company Ltd., Tech Mahindra Ltd. and Housing Development Finance Corp. -- representing around $465 billion in market capitalization (21% of the NSE Nifty Index weight, 17% of total foreign institutional investor holdings) will change, Jefferies said in an investor note.

Apart from formal CEO changes, certain companies such as Reliance Industries Ltd. have gradually initiated generational changes in leadership as well, it added.

So what will be the possible impact of leadership changes on stock performance?

To find out the likely impact, Jefferies analyzed 72 CEO transitions over the last five years among large listed companies.

Impact Of Past CEO Transitions

Jefferies said to analyze the CEO transition impact on stock performance, it defined the 'zero date' as one month prior to the actual announcement of CEO change, given that the market usually senses such changes.

The list of these 72 changes excludes the ones in which promoters are seen to be in active management (DLF Ltd. and Maruti Suzuki India Ltd.) and also in most public sector undertakings (PSUs) where such changes are government-directed and fairly routine, it added.

To analyze the stock impact, the brokerage looked at its relative performance over a +/- six-month period from the 'zero date' as over longer terms, multiple other factors can influence stock performance.

Internal Hires Versus External Hires

Jefferies said the impact of CEO transition was fairly even for stocks, with about half (53%) of the events not producing any change in the relative performance of the stock i.e., stocks outperforming leading up to the transition continued to outperform post transition as well.

“Ditto for underperforming stocks,” equity analysts Mahesh Nandurkar and Abhinav Sinha said in the note.

The brokerage said in cases where stocks reversed relative performance (the balance 47%), 68% of the changes were for good, meaning underperforming stock becomes an outperform stock in six months, split equally between internal replacement versus external replacement.

Mid-Caps Versus Small Caps

Jefferies said the reach for an external candidate as a replacement CEO was, as expected, higher in smaller cap companies, with 55% of them choosing to hire externally.

Meanwhile, less than 40% of large cap companies replaced CEOs with external hires, it added.

Sectoral Trends

The brokerage said among sectors, CEO change had a disproportionate change in consumer staples (5/7 saw change in relative performance) and non-bank financials’ (8/10), but practically none in consumer discretionary (only 1/10 saw a performance change).

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