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Navigating A Changing of the Guard

by | May 1, 2023

As part of our quality assessment of a company, one of the key pillars is evaluating and judging management. This means when there is a change at the CEO level, we spend time assessing its potential impact on the business. In our experience, most CEO turnover falls into one of three buckets: retirements or departures due to succession planning, personal reasons, and terminations. Long term succession planning is vital when assessing successful CEO turnover. Yet, each of the aforementioned events raises its own set of questions for our investment team and the answers related to them are never obvious. There is no precise formula that applies in all scenarios when evaluating the quality of management.

By and large, the turnover we have witnessed historically is attributable to the first bucket; retirements. When it comes to our first interactions with a successor, as was the case when we spoke with Duncan Wanblad, Mark Cutifani’s successor at Anglo American (Materials, United Kingdom), it is a little bit like a job interview, where we sit down and ask each other a series of questions to see if there is a match.

  • What does the new CEO believe their sustainable competitive advantages are and what steps are planned to re-enforce them?
  • What are the key investment metrics intended to focus on to drive the organization forward?
  • What is the philosophy when it comes to balance sheet strength?
  • Where and how can we expect you to be different than your predecessor?

While the ones above may be deemed obvious and specific to the business, there are also questions that delve into assessing accountability, character, and values. These would apply and have relevance regardless of how the CEO transition occurred.

  • Are there shared values of honesty, transparency, and humility?
  • How readily does the individual speak of mistakes and lessons learned?
  • How forthcoming is the individual on assessing the state of the union?
  • To what degree does the individual value the relationship with shareholders and view them as partners in the business?
  • Is the talk matching the walk?

All such questions are part of an evaluation we go through as an investment team to gain comfort around whether we are still partnering with a like-minded individual and whether the underlying qualities that originally drew us to that business, are likely to remain in place.

When a CEO change is triggered by a personal reason as we experienced with RS Group (Industrials, United Kingdom), this is usually an unforeseen event, which leads to the topic of succession planning. Succession planning is an important objective any CEO should be tasked with addressing.  We need only look at the current situation at the Walt Disney Company (Communication Services, United States) with Bob Iger retiring and returning as CEO, being a prime example of the problems that can ensue if not managed correctly.

This brings us to the final bucket – terminations – where we have seen holdings like Adbri (Materials, Australia), Fresenius Medical Care (Health Care, Germany) and Smith & Nephew[1] (Health Care, United Kingdom) make a deliberate change. A CEO termination is a critical time to reflect and ask ourselves about potential red flags that perhaps we missed along the way. It also provides us with the opportunity to interact with the remaining management team, at times the chairperson and ultimately the successor, which we did in all three instances above.  When the CEO of a holding has been terminated, we are left with difficult questions to ponder.

  • How challenged is the business given past apparent missteps and has its quality been impaired?
  • Was the strategy, its execution, or both, the reasons that led to their termination?
  • What type of CEO has the right skillset to take the business forward?

Of the five quality criteria we use to identify a quality company, management is perhaps the most difficult one and benefits the most from long term experience.  It is very important not to confuse charisma for ability. As highlighted above, the many types of discussions we have had over the years have provided us with invaluable lessons and have led us hopefully to ask deeper and more insightful questions of our current CEOs and their respective management teams.

[1] Source:  Sprucegrove, MSCI, FactSet
In the case of Smith & Nephew, we initiated a position in the company post the CEO’s termination.

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