Why more CEOs could be kicked out the door soon
That CEO you have gotten used to hearing on quarterly earnings calls in the 10 years following the Great Recession could be on the cusp of being booted, no matter of the stock’s performance.
The reason: a need for boards to tap into skillsets beyond cost-cutting to prepare for the next 10 years “During and immediately following the financial crisis, a wave of new CEOs began cutting costs, over-examining efficiency ratios, rebuilding balance sheets, paying down debt and buying back stock — trends that have seemingly persisted despite a vastly improved operating environment. While the “defense wins championships” mentality has seemingly served executives well, judging by the 14.5% compound annual growth rate of the S&P 500 since February 2009, we believe this cycle may have run its course,” wrote BMO Capital Markets strategist Brian Belski.
Best dust off those resumes and contact lists, well-paid CEO.
Yahoo Finance by the numbers: Belski’s analysis suggests war-time CEOs — known for ruthless cost-cutting during slow growth years and limited vision beyond that — have sat in the top job perhaps for too long following the Great Recession. The average tenure of a departing S&P CEO reached 10.9 years in 2017, the highest since 2002, and well above the historical average of nine years.
The percentage of S&P 500 CEOs 64 and older climbed to 17% in 2017, the largest amount since Conference Board data collection began (2001) and well-above the historical average of 10.6%, Belski noted.
“We believe the [economic] environment is very different now. As such, there is a high likelihood that a new cycle of CEOs in America will result over the next few years that will have skill sets that encompass more growth traits (on-shoring, capex, M&A). As a result, we believe the days of “under promise, over deliver” earnings reports are likely to segue into growth and business expansion again,” said Belski.
Fresh data hints many boards are already starting to rethink what type of CEO they need.
A total of 149 CEOs left their posts in October, well above the average 98 CEOs who exited in October since 2002, according to Challenger Gray & Christmas. Last month’s total was 41.9% higher year-over-year. So far this year, 1,176 CEO changes have been recorded, 21.1% higher than the 971 who left through October last year.
“We haven’t seen these numbers since the height of the recession, but the circumstances couldn’t be more different,” said Andrew Challenger, vice president of Challenger, Gray & Christmas, Inc. Challenger thinks a host of reasons have contributed to more CEO shake-ups this year, such as the healthy economy and the desire for greater transparency in the #MeToo era.
Why it matters to investors: In the era of the cost-cutting CEO — say the past 10 years — investors have grown accustomed to big quarterly earnings beats as a result of frugalness in the corner office. Often the out-sized earnings beats have been byproducts of strong profits which, of course, has reflected tight management of costs. But if a board opts to bring in a more growth oriented CEO, it could come at the expense of strong earnings today. In effect, this new crop of CEOs will push up their spending on various projects in the hopes of driving strong profit growth down the line.
That’s a different approach to doing business that investors will have to get used to, or seek out opportunities elsewhere.
The bottom line: Change could be coming to many C-suites in 2019. Get ready for the era of growth-minded CEOs.
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Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on Twitter @BrianSozzi
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