Sometimes there’s a bit of company news that makes my ears prick up.
Here’s an example: despite announcing that first half profits would be below expectations, Tesco shares were up 3% first thing Monday morning.
This was on the news that CEO Philip Clarke is to be replaced after just over three years in the hot seat. He’s had a tough time, and it’s a rather sad end to a four-decade career with the UK’s biggest retailer.
Some people are bullish on Tesco – my colleague Bengt, for example, wrote yesterday that he sees Tesco as a solid turnaround play – but this development isn’t enough to spark my interest in the over-invested food retailing industry.
No, what really interested me about this news is that it confirmed one of my investment rules of thumb – that you must be wary when a CEO goes for no obvious reason.
And the departure I’m referring to here isn’t Mr Clarke’s, it’s the one before.
What did Leahy know before he left?
Terry Leahy was the celebrated leader of Tesco that Philip Clarke took over from in 2011.
Leahy had been in charge for 14 years, so you might think the time had arrived for him to retire gracefully and put his feet up after such a long stint.
But he was just 55 when he stepped down. There was no obvious reason why he would want to leave a business that had been staggeringly successful under his stewardship.
Tesco’s market share had grown to a massive 30% in food retail and it was taking one in every eight pounds spent by UK consumers. He had overseen innovations such as ClubCard, and a successful move into internet retail.
I met him several times during his tenure, and it was clear he lived and breathed Tesco. I’d seen his early low-key meetings with my fund manager colleagues develop into supremely confident performances. He clearly had plenty of power and authority.
So why did he give it up at an age when he should have been in his managerial prime?
When the going gets good – get out
I think Terry Leahy was smart enough to realise that things were as good as they were going to get.
We can’t know exactly what warning signs he could see; but I’m sure he sensed much tougher times ahead. The chance to bow out at the top and take the accolades was presumably too attractive to turn down.
There was one blot on his copybook which was easy to spot though. That was ‘Fresh & Easy’ – Tesco’s ill-fated attempt to break into the US market. It was always going to be a long shot, and the experiment ended up costing the shareholders £1.2bn.
Philip Clarke was left to deal with this underperformer, and I’m sure it proved a distraction from the mounting problems in the core UK operation. The decision to close it was taken last year, so it was Clarke who took the flak for Leahy’s mistake.
And now that we’re on the topic of CEO departures, there’s another one that has always niggled me.
A very strange decision at HBOS
James Crosby’s decision to leave HBOS struck me as a very strange one at the time. Under his leadership HBOS became our fourth biggest bank and had been a good investment.
He stepped down in 2006 at the age of just 50. It wasn’t as if he had been holding someone else’s career back – his successor Andy Hornby was a mere 38 years old with limited banking experience.
When I met Hornby he seemed very bright, but rather out of place – it didn’t seem like a natural move at all.
And of course, Crosby’s timing was brilliant. He left a full two years before the financial crisis hit, leaving Hornby with a toxic legacy. This kept him out of the firing line for quite a while; although the press and Parliament eventually caught up with the responsibility he bore for the bank’s failure.
It’s all well and good looking at these events long after the fact – but there’s something you and I can do as investors to gauge whether or not CEO movements should be taken as a warning.
It’s always worth asking why
It might be easy to read too much into such unusual CEO career developments. But good investment judgement involves piecing together lots of snippets of information.
We’d all agree that the decision to move jobs isn’t one that gets taken lightly by any of us, but it’s a much bigger deal at CEO level when you’re in the public eye.
So whether it’s a big company or one of the smaller ones we prefer at Penny Sleuth, it’s always worth asking yourself: “Why? Why would someone make that move? Does it make sense?”
Or do they know something that we investors don’t?
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