Wall Street Stinks at Identifying Great CEOs
Monday had to be a bad day for Thorsten Heins. The night before, Research in Motion (maker of BlackBerry) announced their co-CEOs were stepping down and the Board placed Mr. Heins (then COO) in the driver seat.
Wall Street must have liked this news before the market opened Monday morning. Pre-market trading activity was bidding the stock up as much as 8%. Then Mr. Heins hosted his first conference call to the investment community. Ten minutes into the call, the stock switched directions after Mr. Heins made it clear that he had no plans to bring "seismic change" to the company. The stock finished down 8.8% for the day. Apparently investors were hungry for something "seismic".
Footnote: Sam Palimasono made a similar statement after becoming CEO of IBM in 2002. In a media interview, he poo-pooed the idea of bringing a vastly different strategic plan to the company. Investors were underwhelmed and the stock burped for a few weeks. Ten years later, shareholders were handsomely rewarded.
For BlackBerry loyalists, there's hope. New research published by James Citrin claims the first day stock reaction to new CEOs are poor predictors of company success during full CEO tenure. After reviewing 314 companies with CEO transitions between 2004 and 2009, Citrin concluded there's almost no relationship between initial stock market reaction to a CEO and longer term performance.
In fact, the slight relationship that existed was inverse. In other words, stocks that reacted negatively on the first day of a CEO appointment slightly outperformed the companies that experienced upticks on day one. And he added that stocks which had the biggest one day upticks (5% or more) had the lowest ratio of long-term winners to losers.
To be clear, I'm not making a case for RIMM or its long term prospects. I merely found this data to further demonstrate that Wall Street's best and brightest seem to have ZERO advantage when it comes to sizing up the potential of CEO talent. They try. But it turns out the numbers and models they're most comfortable with are rear-view mirror analytics. CEO transitions are about the forward looking properties of talent and potential.
This reality creates a giant opportunity for talent management and assessment companies. Leadership assessments, engagement metrics, and culture evaluations are examples of big data opportunities to quantify and predict future performance.