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.
I think as you allude that the reaction in RBS’ share price is more about what the departure of Hester may say about the path forward for RBS.
For example, on the day I presumed it meant that the good bank / bad bank split was fully back on the agenda for RBS. The briefing afterwards has hinted at that but that would be a real kick in the teeth for investors I believe.
A CEO departure that is really interesting is Christine Day leaving Lululemon in the US. Now there’s a move that is apparently pretty meaningless (she’s good, but not that good, and the founder is still chairman). I bought a few shares on the same sort of logic of your article here.
Regarding the good bank / bad bank issue – Hester’s exit implies that and a host of other things, but ultimately making decisions on these kinds of individual issues is like betting on the roll of a dice rather than investing for the long-term.
Your example is probably a good one – a random CEO leaves and that highlights uncertainty, so some short-term “investors” bail out leaving those with a long-term view to get in at a more attractive price.
It is just a behavioral reaction taken in a falling market. Nothing more than that.
I may not be right, as I have not invested in RBS and it may be hard for me to understand the type of investor that takes a decission to invest in RBS.
It just occurred to me that some investors were very knowledgeable of what this was all about. Mr Hester was for maintaing some global status for RBS when the Government is for a local (UK) bank. Probably the first option was better for a shareholder but the politicians want to be re-elected and share price comes second.