What Makes CEOs Outperformers - Feb 22

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Does leadership affect a company's performance?

K.Kumar, Partner & Industries Leader, Deloitte, shares insights from Deloitte's study on the significance of the CEO’s role in influencing company performance. Deloitte conducted a study of a select few Nifty 50 companies ﴾as listed on June 2021﴿ that experienced CEO transitions over the past 1.5 decades since 2005.

E

very

organization

leadership

not quite fit in, like public sector companies that do

transitions in its lifetime, each of which can

not have the same objectives as private CEOs have. We

have

also had one or two companies that did not have CEO

far-reaching

undergoes implications

for

the

company’s business and financial performance. Deloitte

changes at all. We eliminated that.

researched select few Nifty 50 companies that experienced CEO transitions over the past 15 years to understand just how significant a relationship between leadership change and company performance is and what sets the outperforming leaders apart. The research indicated the vital role boards play in selecting the right candidate, managing the change, and laying the groundwork for new leaders.

We also looked at CEO tenure of at least three years. The hypothesis that we had was that it takes three years for a CEO to demonstrate performance.

After we eliminated all of that, we had 49 CEO transitions and 25 companies fitted into our definition.

We

broadly

broke

them

into

services

manufacturing. In Services, we included everything

We researched Nifty 50 companies for the period from 2005 to 2020. We deliberately stopped it before



When we drilled down further,

the pandemic as everything changed with the pandemic

we were able to see that 80% of

setting in. The study did not require us to have this

the CEO transitions were in

year's data but the track record of companies and CEOs

some sense planned. Therefore,

over longer periods of time. Therefore, stopping at 2020 was not a big issue for us.

28

companies, by and large, had time for succession.

We also looked at eliminating companies that did

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and

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from Banks to IT services to Telecom and, in manufacturing, everything from consumer business to chemicals and so on.

CEO transitions that took place in the last 15 years



observation was the top

happened due to the below four main reasons:

companies in India seems to

• CEO Retired / Contract expired (43%)

place a lot of premium on

• Resignation / Removed (20%)

experience and age profile.

• Transferred / Promoted (23%) • Promoter

stepped

down

and

One very interesting

brought

a

professional CEO (14%)

In our entire sample set of 49 CEOs, there were only three women CEOs, indicating the need for diversity and inclusion. That should concern us and we have to do something about that. When we drilled down further, we were able to see that 80% of the CEO transitions were in some sense planned. Therefore, companies, by and large, had time for succession.

if there was a causal effect. This is a topic we'll pick up another time.

Age and Experience Matter One very interesting observation was the top companies in India seems to place a lot of premium on experience and age profile. (See Fig 9 of the report) The median age of new CEO in the manufacturing industries

Global Events

is about 56 years and of service CEOs is about 49 years.

There seems to be a tendency to have CEO transitions

immediately

after

global

events—for

example, in 2009 on the back of the global financial crisis; in 2013, when we saw the taper tantrum and, in 2016, the election noise that came out of the US, Brexit and so on. We did not try and take those events to see

This is India specific and sort of counterintuitive. This is not happening around the world. We somehow think that youngsters are becoming CEOs. It's probably not the case in India. Parag Agarwal would not have made it to the CEO had he looked for a job. He wisely stayed with his company and made it big.

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Two relatively young individuals who are 40 to 44 that made it to the CEOs were not from service companies but from the fast-moving consumer goods (FMCG) companies.

Two, it reflects in the performance of the company, the quality of governance and their ability to set expectations.

Since we compared companies across multiple sectors, we did not just look at the percentage increase

Tenure

in stock prices. We took four measures of performance:

We also looked at how much tenures the companies

1. Relative to Respective Index: An increase in

give their CEOs. About 50% of the CEOs have less than

stock prices is always going to be measured

five years. If you add CEOs who have had much shorter

with reference to the industry index. You can

tenures, it's almost 61- 62 percent, where the tenure is

have a banking company growing at 12% in

about five years or far less. In fact, this is being skewed

premium. But if the banking index is growing

a little bit by banking, which gives fairly long innings

at

to their CEOs. IT gives the shortest tenures. One can

underperforming. But a chemical company

understand manufacturing CEO tenures are short

growing at 6% would be an outperformer if

simply because they get into their jobs when they are

the relative index is growing at 5%.

near 56. (See Fig 6 of the report)

13%,

they

would

be

seen

as

2.By what percentage is the incumbent CEO

We left the demographics out of the way. Let us

performing better? We can have a CEO who is

now look at how the CEOs performed. We looked at

performing very well, but I would call him an

stock performance as the indicator of performance for

outperformer if he or she is able to perform

two reasons. One, everybody understands this and it is

better than his predecessor. So by what

fairly transparent, at least for the Nifty 50 companies.

percentage is the incumbent CEO performing

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

What also came out as a bit of a shock was that 80% of the time, a CEO who succeeded one who was sacked or who resigned, ended up being a laggard or a modest performer.

better than the predecessor was the second parameter that we tried to track.

Modest performers do not necessarily erode value.

They add some premium but, in comparison with the

3.Premium over the Index: How much of

first two categories, they were not generating that kind

premium am I able to deliver over and above

of a premium growth. That's really why we ended up

the index? If the index is at 10%, if I am able to

having four groups of CEOs.

deliver a premium of 40%, I would be considered a better performer than someone who delivers only a 10% -12% premium over the index.

delivering the premium? We did not want a situation where a CEO performs and delivers high premium in year one and nothing in year two, average in year three and so on. We eliminated that concentration bias by adding a weight to consistency in performance.

laggards. They underperformed the index or the predecessor or they were not able to consistently perform or they were not able to add sufficient premium.

Leaving out laggards, the others were able to build a premium from something like -0.67 to close to 12% but if you look at the high performer and stalwart

Four Clusters of CEOs

groups, they were able to build a performance of up to

We ended up getting four clusters and called them: • Stalwart CEOs or really high performing CEOs

• Laggard CEOs

tended to be high performers or stalwarts. They were rest. Roughly half of them, 45 percent of the CEOs were

The last measure was how consistently am I

• Modest performing CEOs

Out of the 49 CEOs that we looked at, 12 of them able to add significant amount of performance over the

Consistency

• High performer CEOs

How did they look like? (See Fig 8 of the report).

22%, which is roughly twice that of what the average peer group is able to do.

Therefore, you can have a situation where irrespective of the industry, you can have CEOs performing at much higher levels than their peer group.

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

High‐performing CEOs tend to peak much later in their careers. Stalwarts tend to peak in 4.6 years and they tend to grow their share price for 4.8 eight years.

That is an important lesson. We broke this down even

performers 3.5 years. 84% of the CEOs came from

further to see what causes high performance with the

within the organisation. All the stalwarts came from

CEOs.

within. This is not to suggest that outsiders cannot be successful CEOs but it's an interesting fact. Should

Shocking Reality

CEOs come from within or without, should they be aged

What also came out as a bit of a shock was that 80% of the time, a CEO who succeeded one who was sacked or who resigned, ended up being a laggard or a modest

or young are contentious topics.

How Do They Peak?

performer. It was funny and therefore, we started

High-performing CEOs tend to peak much later in

looking at what role did the company and the board

their careers. Stalwarts tend to peak in 4.6 years and

have in setting up these CEOs for success.

they tend to grow their share price for 4.8 eight years.

We had about 12 high performers or outperformers who can substantially better the industry and peer group in terms of the premium and the shareholder reward that they can generate. It is interesting that high performers tended to be of a slightly older age profile.

It's not as if they did not perform better than the peer group. In the beginning, they were performing better than the peer group in any case, but they continue to perform at a much higher level, for a much longer time.

Their tenure tended to be about six years or so.

I have nothing against young or old and I'm not

Out of the six years, for about five years, they tend

suggesting that this is how we should do things in the

to have increasingly high performance, on a year-on-

future. We seem to have a tendency to look at slightly

year basis, which is fantastic. If you look at the

more experienced ones, like the older people.

laggards, they tend to peak in six months’ time. They

The other thing that we noticed was that high performers tend to have a much longer tenure.

Stalwarts tend to be CEOs for 6.5 years and modest 32

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come in and outperform the industry. Even if they underperform, that underperformance peaks in six months’ time after which, they either flat out or get

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into decline. The modest performers tend to peak out

succeeding CEO. What we found out was the succeeding

in two years and they are able to increase share prices

CEOs or the new CEOs are able to do two things. One,

for about a year and eight months or so, whereas the

they not only focus on internal efficiencies and cost

laggards are able to increase their share prices for 2.6

cutting and things like that. They are able to, even in

years. Boards get impatient when share prices do not

the first year, focus on things like premiumisation.

increase.

They are able to think about scale, market growth and

The CEO being an outstanding performer has a huge impact for the shareholders because they not only outperform but outperform for long periods of time, increasing shareholder value.

overseas expansion. So, not being single dimensional, but being able to address both internal efficiencies and external market customers is a big advantage.

The second thing which came out very clearly was that many of the topics that we saw in the previous

Differentiators

CEO's tenure and the new CEO's tenure happened to be

What differentiates between the outperforming

common, which means the successful CEOs are able to

CEOs and others? We looked at the management

take forward some of the best things that worked with

discussions of the stalwart companies and the high

the previous CEO.

performing companies to see if there are consistent messages coming out in the management discussions during the previous CEO's tenure and the succeeding CEO's tenure, particularly with reference to the

There is a tendency of some CEOs to come and sweep the table clean and then bring in new ideas, whereas the best performing CEOs are able to identify and take forward what worked in the past. In that

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sense, they are able to hit the ground running. There is

you can have a CEO peaking in five years or

tremendous amount of continuity and the fact that

towards the end of the tenure. It becomes the

many of them also happen to be insiders seem to help

job of the board to ensure that they set clear

this. It tells us that good CEOs do not require a lot of

time frames and performance expectations to

startup time.

the CEO. You can pressurize the CEO to perform in a very short time. He or she will

They are not overly focused on the margins. They

probably do that; but you probably are in

are able to look at leveraging return on equity and

danger of being left with a laggard, who will

marketplace performance. It is not just a P&L

never be able to perform on a growing basis,

performance that they focus on, but also on the broader

over the rest of his or her tenure. Therefore

health of the balance sheet.

how the board is able to set the CEO for

Takeaways for the Boards

success is very important in ensuring smooth transition or building a strong pipeline.

• Look at how strong your leadership is. It is not just identifying an individual. How are you

• The amount of premium that companies were

preparing this individual to be a successful

able to build when they had more than two

CEO? Many boards do not think of this as

CEO transitions was half of the premium that

their primary task but we recently presented

the companies were able to build when they

this to a bunch of very senior independent

had only two transitions. Therefore, even a

directors and chairs of boards. They said that

single extra CEO transition brings down your

they consider being responsible for the

ability

leadership pipeline is the most important

Therefore the submission to the boards would

thing in their world. If you do not have a

be: don't get trigger-happy. Give the CEO the

process of developing your future leaders,

opportunity, set the right expectations and

then you are making a big mistake.

right time frames. The more frequent changes

to

build

marketplace

you make, the lesser is their ability to

• People do not well understand how boards can

generate shareholder value.

help CEOs transition into their roles very smoothly, particularly when you have CEOs

• It seems like the CEO transitions peak when

who come from outside. The best CEOs are

there is a global event. The boards must

able to win because they are able to ensure

ensure that these events are factored into the

continuity of strategies and policies. If you do

performance expectations of CEOs.

not, as a board, help CEOs transition, help

• Finally, the picture of women CEOs is very

him or her with understanding of what has

bleak. We see only 3 out of 49 as women CEOs

worked well in the past and not allow things

even in top 50 Nifty companies. Boards must

to change every three years in an abrupt

work seriously to change this scenario to

fashion, then you can have a CEO who can

ensure diversity and inclusion. 

deliver high value to the shareholders.

• You can have a CEO peaking in six months or 34

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premium.

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