Talking Points: Why is CEO departure such a perennial fascination to investors?

There is one question we can guarantee to ask when conducting discreet referencing on a CEO candidate – or an NED candidate with an executive background: “Under what circumstances did they leave their previous post?” The manner of a CEO’s departure is a prism through which we can peek – albeit briefly – behind the corporate veil to understand something of the human dynamics that influence corporate success or failure.

Over the weekend, Jonathan Guthrie published an excellent piece in the Financial Times exploring this very theme and putting forward his own method for scoring the mood of CEO departures based on the tone of the board announcements that accompany them.

Guthrie points out that a major leadership change is often accompanied by a material shift in the value of company’s stock. These events can also shed a momentary light on dynamics that may inform the future performance of the business. Yet he also acknowledges that boardroom coups and defenestrations can be remarkably difficult to parse from the scrupulously produced PR-speak of an official press release.

In conducting discreet references, we speak to the former colleagues of candidates and gather a detailed picture of the culture over which a CEO has presided, the nature of their management style and the regard (or lack thereof) in which they were held.

This is rarely as direct as simply asking the question – “Why did they leave?” Most referees today are wise to any risk of breaching non-disclosure covenants or sharing confidential information. Instead, by focusing on culture and behaviours, our references help to piece together a picture of the numerous factors that may have resulted in a departure.

Take the example of the individual who was being considered as CEO of an £8 billion construction supplies business. Our referees did not provide a “smoking gun” reason why he had left his previous company, but they did warn that he was “high-handed” and “lacking in emotional intelligence and people skills;” someone who when confronted with a difficult situation, felt it imperative to “save face.” The candidate was hired. But – low and behold – within 18 months he had been fired for creating what the board described as a “hostile working environment.”

Press release analysis is one way to catch risky appointments. Another is to conduct rigorous, independent discreet referencing.