The Royal Bank of Scotland announced this week that its CEO, Stephen Hester, would be stepping down later this year. The market reacted badly and RBS suddenly found its market value down by about £2 billion in just a few hours.
Is this a rational reaction from investors?
There is no doubt that Hester’s departure will cause many other changes within the Royal Bank of Scotland in the months and years ahead, but what will those changes be? Whether they will be for better or worse is far from clear.
It’s true that the announcement has highlighted tensions between the government and the bank, but surely these tensions were already well known? And even if they weren’t, I don’t think it’s clear how the government’s input will affect the bank in the long-run.
What is clear is that the value of RBS fell by £2 billion because investors found out that the CEO was leaving.
If the market is rational then the sell-off doesn’t represent a knee-jerk reaction by irrational investors. Instead, it represents an informed and calculated assessment of the value of RBS by the combined wisdom of many thousands of intelligent people. If those people are right and Hester is worth £2 billion, then his income of less than £10 million means he was woefully underpaid; a statement I think few would agree with.
But this isn’t the first time we’ve seen the market overreact when a popular (or at least effective) CEO leaves a company.
The same thing happened at Reckitt Benckiser in April 2011 when Bart Becht announced his departure. The news surprised many investors and the share price fell by around 7%, wiping more than £1.5 billion off the value of the company.
If the market was right then we must believe that Reckitt Benckiser really was worth around £1.5 billion less without this one man than it was with him. Of course we can never know how the company and its shares would have performed had Becht stayed on, but we do know what happened without him.
After Becht announced his departure, Reckitt Benckiser continued to grow its sales, profits and dividends, just as it had before the announcement. Despite the absence of Becht, the shares rallied from 3,115p on the day of his announcement to 4,546p today. That’s a gain of 46% in 2 years, not including dividends.
It seems clear that investors’ fears over the departure of a much admired CEO were misplaced, and if investors were wrong to sell then, they could be wrong now.
CEOs are an important part of any company, but their departure or arrival should rarely be a reason to buy or sell. In most cases, investors would do better to focus on the long-term fundamentals of the company, and not who is or isn’t going to be CEO for the next few years.