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When a plan comes together

25 October 2011 By Antony Currie

Shareholders hate surprises – not least when a company’s chief executive is suddenly hoisted out of the corner office. Three big U.S. firms did just that on Tuesday. It would be easy to make a call on the relative importance investors attached to these defenestrated chieftains using the share price reactions alone. But that would miss the real lesson: boards must carefully plan successions.

Take First Solar, one of the largest publicly traded players in the renewable energy sector. Along with rivals, its stock has suffered this year, falling by two-thirds amid fears of mismatched supply and demand and the fallout of Solyndra’s bankruptcy. Ousting Chief Executive Rob Gillette out of the blue sent it down a further 25 percent on Tuesday.

That might make it look as if shareholders thought he was worth the $1.3 billion the company lost in value. But it’s the company’s decision to issue a terse announcement in the middle of the trading day shedding no light on why Gillette’s leaving that spooked owners. It leaves them no option but to imagine their own reasons. And Corporate America has provided plenty of real-life scenarios to whet their creativity.

Meanwhile, Quest Diagnostics’ 11 percent jump, worth nearly $900 million, after announcing that Surya Mohapatra would step down in six months, implies shareholders thought he was a disaster. He has made some unpopular strategic moves, but can also boast of having increased revenue five-fold in his 12 years on the job. One key to the positive reaction is the board’s decision to boost the dividend by 70 percent. Another is that with no successor yet named, Quest now looks like a takeover target.

Then there’s IBM. Its stock hardly budged after the board announced Virginia Rometty would take over from Sam Palmisano. That might make her look a bit of a non-entity. But it’s the perfect reaction to a well-planned, timely succession: she already works at the company, and by staying on as chairman, Palmisano adds extra continuity. Of course, that’s a luxury only stable companies tend to enjoy. But there’s no reason the likes of Quest, First Solar – and countless others – can’t learn from it.

 

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