One of the most vexed questions in high-level corporate decision making is when is the appropriate time for a successful executive to retire or resign. The issue becomes further complicated when the executive is a founder of the company or has played a significant role in its long-term growth.
In Business Spectator, former banker turned novelist John Green made a reasonable point — noting that “critics typically bow and scrape to the grand god of averages, as if any CEO or director who outlasts the market’s average tenure is committing a terrible sin, when the opposite is usually truer”. This is no doubt true in many cases — with shareholders at times too quick to forget an executive successes and often focus on short-term results.
However, while a founder or long-term CEO is often more likely to know a business and know its customers better than someone who was appointed as a steward of capital, even founders and long-time executives have a use-by date. Green used the example of former Macquarie Bank CEO Allan Moss, questioning; “Should Macquarie Group’s board have fired one of Australia’s then longest-serving and most successful CEOs, Allan Moss, after seven years? Or even 13? Criticism based on simple time-serving should be dismissed for the absurdity it is.”
Perhaps Moss wasn’t a good example. Looking at Macquarie’s recent performance, it is certainly arguable that the answer should have been “yes”. While Moss can claim significant credit for Macquarie’s meteoric rise — he was also in charge when the group levered up and rolled out the now-discredited Macquarie Model. In 2007, Macquarie shares peaked at about $98 — by the time Moss retired, $100 million richer in 2008, Macquarie shares had slumped to $61.
At the height of the GFC, when Moss’ replacement, Nick Moore, allegedly spoke with high-level government figures about various taxpayer-funded rescue mechanisms (including a deposit and international funding guarantee) for the finance sector (and especially Macquarie), its share price slumped to $15. That is 85% less than its Moss-era highs. Three years on, Macquarie shares continue to languish at $34. This all wouldn’t have concerned Moss, who had sold virtually all of his holdings in the group years earlier.
Then there is the recently-turned octogenarian, Rupert Murdoch. Few would doubt Murdoch’s stellar business record since inheriting the Adelaide News from his father in 1953. Murdoch has since amassed a $6 billion fortune and become one of the world’s most influential people. Of course, things haven’t been quite so rosy for News Corporation shareholders who have seen their investment slump in value in the past 10 years. This hasn’t stop Rupert collecting an annual stipend from shareholders of about $25 million.
The recently departed Wal King was another who appeared to overstay his tenure. CEO of building company Leighton Holdings, King was instrumental in transforming Leighton into Australia’s largest construction firms, owning businesses including John Holland and Thiess. Even rampant government spending on infrastructure projects didn’t help Leighton, as an unfortunately timed foray into Dubai and poor investment choices saw the company’s share price fall $63 in December 2007 to only $29 currently. Despite this precipitous fall, King was paid upwards of $15 million annually and even received a $5 million gift from Leighton shareholders for arranging an orderly succession. King’s largesse may have also been the result of him sitting on Leighton’s remuneration committee — a common trait of long-term CEOs.
Another superstar executive who appeared to stay well past his use-by date was Westfield boss Frank Lowy. Like Murdoch, Lowy has been one of Australia’s best businessmen, but the problem was that Frank’s record in recent years has been less than stellar. While a $1000 investment in Westfield in 1960 would be worth upwards of $100 million today, recent years haven’t been so kind to Westfield shareholders. Westfield shares were $23 in 2007 and have slumped to about half that level in recent times. Despite the poor performance, Frank has been paid about $15 million annually, while his executive sons have also received multimillion dollar paydays.
So while ending the career of a successful CEO too early can be damaging to shareholder returns, not realising when it’s time to move on can be worse.