Does a CEO Resignation Affect a Company’s Stock Price?
Soroush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Every quarterly earnings season, corporate executives the world over are under the public spotlight, as Wall Street eagerly waits to see which execs over and underperform. A disappointing report jeopardizes a leader’s position within a company, a phenomenon evident this season, as several chief executive officers have stepped down this year.
CEOs are the face of their companies and any criticism and negative judgments are directed primarily in their direction. Controversies can lead public opinion to support their ouster, as seen in the rumblings that the big fish at an embattled corporation, such as News Corp boss Rupert Murdoch or Goldman Sachs head Lloyd Blankfein, should step down. With CEO turnover being a prominent way in which a company can prove to stockholders that it plans major change, it is important to understand how such resignations affect stock prices at these companies.
Research in Motion (NASDAQ: BBRY)
At the end of 2011, Research in Motion was a company plagued by scandal and poor results. Observers credited founders Jim Balsillie and Mike Lazaridis with huge advances in the tech industry after the company’s formation in 1984. After almost three decades, however, stockholders were calling for their heads. The bilateral CEO structure, once praised as the fount of RIMM success, received criticism for its inefficiency and inability in handling PR fiascos. Anyone who looked around witnessed the troubling obsolescence of the once ubiquitous BlackBerry. If Research in Motion wanted to compete with Apple and Google in the mobile device market, it would have to prove it was ready for a drastic overhaul.
So, Balsillie and Lazaridis stepped down. Much to the market’s dismay, however, their replacement was none other than RIMM insider, former COO Thorsten Heins. Investors were underwhelmed by the move, altogether disbelieving a noteworthy shakeup was actually even taking place. RIM’s stock price fell 9.1% after the announcement, dropping from $17.24 to $15.67. Shares of RIM were already on a downward trend, and the new CEO announcement did not change the market perception of the country’s strategic future. Although Heins has tried valiantly to present himself to Wall Street as his own thinker, shares continue to see red, down nearly 25 percent since April. The market is getting tired of RIMM’s failed promises, so Heins will have to deliver as CEO before the market takes him seriously.
Urban Outfitters (NASDAQ: URBN)
Richard Hayne founded Urban Outfitters as “The Free People’s Store” in 1970 and has served as company chairman ever since. In January, he added another position to his resume, as he took over as the company’s CEO. Urban Outfitters is suffering from a mammoth inventory and crippling margins that ultimately toppled Glen T. Senk, who came to the clothing company from Anthropologie, a subsidiary, in 2004. While Senk was initially praised for the rapid growth that began in 2007, he ultimately led to a buildup of what is considered “unattractive merchandise.”
The change to Hayne, however, did not inspire confidence in commodities investors. On the contrary, the market expressed skepticism at Hayne’s age (he is 64) and his long-term commitment. Market insiders have also noted that personnel changes can complicate already intricate systemic issues, and Urban Outfitters has always been a lightning rod for controversy. This doubt was on display by the volume of after-hours trading that took place after the announcement was made. Stocks fell 15% from $29.41 at the closing bell to $24.99 after the change became public.
Best Buy (NYSE: BBY)
Consumer electronic retailers have had their fair share of problems over the years, perhaps best evidenced by the decline of Circuit City. Investors fear Best Buy is going a similar route, a concern the company is trying to address by placing emphasis on its “Best Buy Mobile” line. The retailer’s shares have lost over half their value in the past five years, and management announced the closing of 50 of its highest profile stores earlier this year. Financial prognosticators do not see much of a future here, believing the ascent of online competitors like Amazon and eBay will soon replace brick-and-mortar stores. To read more about the future plans of Amazon, check this out. Such a concern is not unsubstantiated, as evidenced by the continuous decline of Best Buy sales.
In April, CEO Brian Dunn resigned, implicitly admitting he was not the right man to right the ship at the company he worked at for three decades. As the directors search for a new chief executive, board member G. Mike Mikan has taken the helm. After Dunn’s announcement, stock prices immediately rose, apparently eager to reward the company’s self-awareness in acknowledging its need for new leadership. The three percent rise in share price was quickly eliminated, however, when it became apparent that a permanent replacement was not immediately forthcoming. It closed the day of the resignation at $21.32, down 5.87%.
Akamai Technologies (NASDAQ: AKAM)
Not every CEO resignation is heralded or, for that matter, even expected. Akamai Technologies CEO Paul Sagan surprised everyone by announcing his retirement earlier this year. As the impetus for his stepping down is not malaise or scandal, he will stay on until a replacement is found. Sagan has been credited with skilled management at the company he joined in 1999. He watched as Akamai’s founder passed away in the September 11th attacks and stayed on as emerging computing technologies threatened the way the Internet content delivery network did business. He successfully directed Akamai from the DSL days to the present, a time of high broadband Sagan had to restructure his business to accommodate.
Akamai is now a leader in online streaming, a primary ramification of Sagan’s handiwork. Sagan announced his decision to help the company transition to new leadership after a stellar first quarter earnings report that showed profits rising 7.9%. The market initially acknowledged that the company beat its forecasts but fell 6% after-hours, likely the result of crediting the resigning CEO with almost all of Akamai’s success.
Looking toward next earnings season, which begins next week, investors are wise to follow any further news of CEO turnover. To track this and other trading ideas, visit WealthLift Insider.
This article is written by John Kocsis and edited by Jake Mann. They don't own shares in any of the companies mentioned above. The Motley Fool owns shares of Best Buy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
