Communicating Critical Events: CEO Transitions and Risk to Enterprise Value

October 2011

FTI Consulting | Strategic Communications Practice

1

Objective

§  To explore the value-at-risk (VAR) associated with leadership changes, segmented based on the circumstances leading to the CEO transition.

Primary Research §  FTI Consulting conducted primary research among institutional investors. In total , FTI Consulting

solicited feedback from 358 portfolio managers and analysts across 37 countries. At 95% confidence margin of error is +/- 5.17%.

Secondary Research

§  FTI Consulting Global CEO Transition Study considered all CEO transitions among companies that had a market capitalization greater than $10B at any point during the time period of July 1, 2007 through June 30, 2010 – This resulted in 263 CEO transitions across 35 countries.

§  To determine the value-at-risk, the selected CEO transitions were analyzed based on net stock price performance relative to a comparable index commonly referred to as “alpha” (i.e., a positive alpha indicates the stock outperformed its benchmark index).

Global leadership transitions Research objective & methodology

2

Profile of the Sample Population Global CEO Transition Study

3

Significant turnover of large-cap company CEOs

*FTI Consulting’s Global CEO Transition Study considered all CEO transitions among companies that had a market capitalization greater than $10B at any point during the time period of July 1, 2007 through June 30, 2010 – This resulted in 263CEO transitions across 35 countries.

North America 102 CEO transitions (36% of all N.A. companies)

South America 3 CEO transitions (75% of all S.A. companies)

Europe 62 CEO transitions (23% of all European companies)

Asia Pacific 44 CEO transitions (34% of all AsiaPac companies)

B.R.I.C. 36 CEO transitions (26% of all B.R.I.C. companies)

Middle East / Africa 16 CEO transitions (48% of all Middle East/Africa companies)

31% of companies announced a CEO transition* 43%

were unplanned, or not part of a succession plan

of those

CEO Transitions

77% came from within the company

had no prior CEO experience 80% and

New CEO Details

4

Importance of CEO reputation and its influence on investment decisions Global CEO Transition Study

5

CEO reputation equals one-third of investment decision

0%

5%

10%

15%

20%

25%

30%

None

atall

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

% of investment decision based on perception of CEO

Average: 31.5%

Question: What percentage of your investment decision making process is based on your perception of the Company’s CEO?

§  The perception of the CEO influences almost one-third of the investment decision

6

CEO reputation as important as reputation of company

0% 20% 40% 60% 80% 100%

Globalreach

Cultureoftheorganiza:on

Brandequityofproducts/services

Reputa:onofCEO

Historicalreputa:onofthecompany

Strategicdirec:on

Recordofmee:ngand/orexceedingexpecta:ons

Compe::veposi:oning

Trackrecordofopera:onalexecu:on

Ranked1st

Ranked2nd

Ranked3rd

Question: Which of the following factors has the greatest impact on shaping an organization's reputation within the investment community?

Key factors impacting an organization’s reputation

§  The reputation of the CEO is nearly as important as the reputation of the company, and more important than the reputation of the company’s products or services

7

CEO transitions offer more risk than opportunity

0% 10% 20% 30% 40% 50%

Extremelyunlikely‐

2

3

Neutral‐4

5

6

Extremelylikely‐7

Decision to sell stock

0% 10% 20% 30% 40% 50%

Extremelyunlikely‐1

2

3

Neutral‐4

5

6

Extremelylikely‐7

Decision to buy stock

39% 15%

§  There is more risk to the CEO appointment than opportunity §  The propensity to sell shares because of the CEO is more than twice that to buy shares

Question(s): Under exceptional circumstances, how important is the CEO to your investment decisions making process? How likely would you be to buy a stock based solely on the CEO, when no other investment criteria are met? and How likely would you be to sell a stock based solely on the CEO, when all other investment criteria are met? 8

Investor assessment of a new CEO Global CEO Transition Study

9

Investors first look to prior track record and former business associates to assess an incoming CEO

2%

3%

4%

10%

18%

63%

0% 10% 20% 30% 40% 50% 60% 70%

Other

Experienceatasimilarlycompany

Experienceatthecompany

Personalreputa>on

Industryexperience

Trackrecordofexecu>on

Question(s): Prior to meeting a new CEO, which factor is most important to you in forming your initial opinion of him/her?To what extent do the following external sources influence your opinion of a newly appointed CEO? (Please rate the following on a scale of 1 to 7, where 1=No influence, 4=Moderate influence, and 7=Significant influence)

Key factors shaping initial opinions

27%

40%

50%

55%

69%

78%

27%

31%

24%

28%

18%

15%

47%

29%

26%

16%

13%

8%

0% 20% 40% 60% 80% 100%

Media

Sell‐sideanalysts

OtherCEOs

Industryanalysts

Formercolleagues

Customers/partners

Significantinfluence Moderateinfluence LiFleinfluence

Key external sources shaping opinions Avg.

5.35

5.05

4.53

4.39

4.05

3.47

§  The prior track record follows the executive to his/her new company and is far and away the most important factor for investors’ assessment of the new CEO

10

§  Industry and sell side analysts

are also influential

§  The media have the least

influence on shaping public opinions

§  The most influential

stakeholders are those with whom the CEO did/does business with

Value-at-Risk in CEO transitions Global CEO Transition Study

11

Enterprise Value at Risk Increases as Time Passes Sp

ecia

l situ

atio

n

NEGATIVE α

MODERATE standard deviation

NEUTRAL α

HIGH standard deviation

Res

igna

tion

NEGATIVE α

LOW standard deviation

POSITIVE α

HIGH standard deviation

Succ

essi

on /

retir

emen

t

POSITIVE α

LOW standard deviation

POSITIVE α

HIGH standard deviation

Announcement Six mo. post start

Time (relative to announcement date)

Plan

ned

U

npla

nned

VAR: Value-at-risk NEGATIVE/NEUTRAL/POSITIVE α: average performance net of comparable indices for the circumstances and time period specified LOW/MODERATE/HIGH standard deviation: standard deviation of α for the circumstances and time period specified

The greater the element of surprise and the higher the potential risk of corporate strategy shifts, the more enterprise value at risk

Value-at-risk (VAR) landscape §  Special situations, such as strategic

transformations, bankruptcies/restructurings and fraud/investigations, presented the most value at-risk (VAR) of all transition types, over both time periods considered

§  Both voluntary and forced resignations demonstrated significant VAR

§  Succession / retirement situations resulted in limited VAR upon announcement

§  VAR increases over time for all transition types: more value is created /destroyed post-announcement, and depends on the actions and success of the new CEO

Enterprise value at risk increases as time passes

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VAR by situation

Succession  /  re,rement  n=150  

Forced  resigna,on  n=35  

Voluntary  resigna,on  n=32  

Strategic  transforma,on  n=14  

Fraud  /  inves,ga,on  n=15  

Health  n=10  

Misc.  crisis  n=4  

Transi'on  announced  

Six  months  post  start  

Transi'on  announced  

Six  months  post  start  

Transi'on  announced  

Six  months  post  start  

Transi'on  announced  

Six  months  post  start  

Transi'on  announced  

Six  months  post  start  

Transi'on  announced  

Six  months  post  start  

$0          

Avg.

mar

ket c

apita

lizat

ion

chan

ge (B

) Av

g. m

arke

t cap

italiz

atio

n ch

ange

(B)

$0.9

$15.8

‐$11.6

‐$2.1

‐$30.0

‐$25.0

‐$20.0

‐$15.0

‐$10.0

‐$5.0

$0.0

$5.0

$10.0

$15.0

$20.0

Bankruptcy  /  restructuring  n=3  

Transi'on  announced  

Six  months  post  start  

Transi'on  announced  

Six  months  post  start  

§  Strategic transformation: VAR correlated to broader corporate change. Strategic transformations had highest negative alpha across all intervals, and 2nd highest potential VAR with unsuccessful transitions garnering an average $24B market cap erosion (-17% average alpha) six months post CEO start.

§  Company circumstances more impact on VAR than how CEO departs: Company-specific factors, such as fraud, regulatory investigations strategic transformations and restructuring/bankruptcy, have more impact on VAR than how the CEO departed (e.g., resignation vs. succession)

Investor perceptions of risk also related to degree of ‘surprise’ and corporate change

5%

37%

40%

75%

24%

39%

33%

14%

71%

25%

27%

11%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Succession/re7rement

Voluntaryresigna7on

Suddendeparturethroughdeathor

illness

Forcedresigna7on/

termina7on

SignificantValueatRisk ModerateValueatRisk LiHleValueatRisk

Question: Under the following CEO transition circumstances, how much market capitalization do you believe is at risk? (Please rate the following on a scale of 1 to 7, where 1=No value at risk, 4=Moderate value at risk, and 7=All value at risk)

Value at-risk due to outgoing CEO circumstances Avg.

5.07

4.16

4.10

2.82

§  Abrupt changes impact short-term enterprise value the most

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Investor perceptions of risk also related to degree of ‘surprise’ and corporate change

50%

85%

85%

92%

32%

7%

11%

5%

19%

8%

4%

3%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Strategictransforma:on

Bankruptcy/restructuring

Crisis

Fraud/inves:ga:on

SignificantValueatRisk ModerateValueatRisk LiKleValueatRisk

Avg.

5.80

5.60

5.50

4.70

Value at-risk due to Company circumstances

§  Significant enterprise threats and transformations impact long-term enterprise value the most

Question: Under the following CEO transition circumstances, how much market capitalization do you believe is at risk? (Please rate the following on a scale of 1 to 7, where 1=No value at risk, 4=Moderate value at risk, and 7=All value at risk) 15

VAR is proportionate to situational urgency, but all instances present risk

41%

50%

57%

61%

81%

84%

36%

34%

29%

32%

11%

10%

23%

16%

14%

7%

8%

5%

0% 20% 40% 60% 80% 100%

Pursuingnewavenues

forgrowth

Replacingabeloved

leader,industryicon

Addressingchangesin

thecompeBBve

environment

Leadingabusiness

transformaBon

Turningaroundpoor

operaBngperformance

Managingthrougha

crisis(e.g.,bankruptcy,

restructuring)

Significantimpact Moderateimpact LiLleimpact

Question: During the first six months following a leadership change, how much impact do the following factors have on enterprise value? (Please rate the following on a scale of 1 to 7, where 1=No impact, 4=Moderate impact, and 7=Significant impact)

Key factors Avg.

5.62

5.44

4.85

4.64

4.54

4.26

§  The more challenging the situation, the greater the threat to the enterprise, the more value is hinging on the outcome

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Management initiatives can reverse initial negative actions, in most cases

Succession  /  re,rement  n=150  

Bankruptcy  /  restructuring  n=3  

Fraud  /  inves,ga,on  n=15  

Misc.  crisis  n=4  

Transi'on  announced  

Six  months  post  start  

Six  months  post  

Avg.

pric

e pe

rfor

man

ce (n

et o

f ind

ex)

Voluntary  resigna,on  n=32  

Transi'on  announced  

Six  months  post  start  

Avg.

pric

e pe

rfor

man

ce (n

et o

f ind

ex)

Transi'on  announced  

Six  months  post  start  

Transi'on  announced  

Six  months  post  start  

Health  n=10  

Transi'on  announced  

Six  months  post  start  

Strategic  transforma,on  n=14  

Transi'on  announced  

Six  months  post  start  

Transi'on  announced  

Six  months  post  start  

Forced  resigna,on  n=35  

Transi'on  announced  

Six  months  post  start  

17

Roadmap for a new CEO Global CEO Transition Study

18

6%

7%

10%

12%

21%

29%

34%

46%

66%

68%

37%

31%

31%

19%

28%

48%

37%

33%

27%

23%

58%

63%

59%

69%

52%

22%

29%

21%

7%

9%

0% 20% 40% 60% 80% 100%

Improvedfinancialperformance

Improvedmarketperformanceandvalua;on

Mee;ngstatedfinancialobjec;ves

Mee;ngstatedvision,strategy

Shapingcompanyculture

Alloca;ngcapitalandresources

Overseeingexecu;onofstrategy

Managingtalent

Establishingappropriateexpecta;onsforkey

stakeholders

SeIngvision,strategy

ShortTerm(<6Mo.) MediumTerm(6to12Mo.) LongTerm(>12Mo.)

There is a honeymoon period for new CEOs in the first six months to set vision, strategy and expectations

Question: Under what timeline do you expect to see traction / execution in the following functions?

Key functions and actions of a new CEO

§  Expectations for performance are relatively long term (mostly after the first year)

§  Investors expect the new CEO to assess the situation, create the vision/strategy and set expectations

19

New CEO’s effectiveness is measured by strategy execution and financial stewardship

8%

3%

9%

80%

0% 50% 100%

Other

Stockperformanceand/orvalua9on

performance

Financialperformance

Execu9onofthestrategy

Most important measures of effectiveness

Question(s): Within the first six months following a leadership change, which of the following is most important when measuring the effectiveness of a new CEO? Within the first six months following a leadership change, which financial performance metric is most important to measuring the effectiveness of a new CEO?

27%

10%

11%

24%

28%

0% 20% 40% 60% 80% 100%

Other*

EPSgrowth

Revenuegrowth

Freecashflowofthebusiness

ROICofthebusiness

Most important financial metrics

*Most commonly submitted responses include: “6 Mo. Is too short to measure with financial metrics” and “situational dependent.”

*Most commonly submitted responses include: “6 Mo. Is too short to form an opinion” and “outlining the strategic direction of the Company.”

§  CEO will be held to his/her strategy

§  Stewardship of the Company’s capital and assets is the most important financial measure of success

20

Investors take a multi-dimensional view of a new CEO

Question: During your initial interaction with a new CEO in their first 100 days, what do you look for to further establish your opinion of him/her?

54%

76%

88%

88%

88%

92%

96%

30%

19%

9%

9%

8%

6%

2%

16%

5%

3%

3%

4%

2%

2%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%100%

Charisma/personality

Leadershipstyle

Astrategicplan

OperaBonalfocus

Vision

Knowledgeof/experiencewithindustrydynamics

Graspofthecompany'schallengesandopportuniBes

Significantimportance Neutral LimitedImportance

Key factors during initial interactions with new CEO

§  Investors primarily look to see how the incoming CEO plans to take command of the company

§  A substantive grasp of the Company’s situation and plans for the future are very important

§  Vision and leadership style are also important in initial interactions

21

Research overview & methodology

22

The FTI Consulting Global CEO Transition Study considered all CEO transitions among companies that had a market capitalization greater than $10B at any point during the time period of July 1, 2007 through June 30, 2010 – This resulted in 263 CEO transitions across 35 countries.

The CEO transitions were grouped and further analyzed by the following categories based on the circumstances leading to the transition: §  Succession / retirement – orderly, planned CEO transitions that resulted from retirement scenarios;

§  Resignation – including:

§  Voluntary resignation – situations in which the departing CEO left to pursue other opportunities; and,

§  Forced resignation – situations where there was evidence of a termination or forced removal from office.

§  Special situations – including:

§  Strategic transformation – significant change in strategy or market position;

§  Bankruptcy / restructuring – bankruptcies or significant restructuring ;

§  Fraud / investigation – corporate scandal/wrongdoing or federal investigation;

§  Health – death or other serious illness that results in a CEO departure; and,

§  Miscellaneous crisis – other event-driven/unforeseen circumstance (e.g., natural disasters.)

Global leadership transitions Research objective

The objective of our research was to explore the value-at-risk (VAR) associated with leadership changes, segmented based on the circumstances leading to the CEO transition.

23

To determine the value-at-risk, the selected CEO transitions were analyzed based on net stock price performance relative to a comparable index commonly referred to as “alpha” (i.e., a positive alpha indicates the stock outperformed its benchmark index).

§  Stock performance was benchmarked against relevant comparable indices based on the country of domicile and local exchange (e.g., S&P 500, FTSE 100 Index, Nikkei 225 Index, Germany DAX Index, Paris CAC 40 Index).

Net stock price performance (alpha) was measured on two intervals:

§  Transition Announced (initial announcement of CEO departure) – measures the initial market reaction (one week prior to day of announcement) of the CEO change; one week was used to account for potential news leakage, global market time zones, etc.; and,

§  Six-Months Post Start (succeeding CEO starts) – measures the stock performance six months following the start date of the incoming CEO.

Each transition was further classified based on a number of characteristics to fully encapsulate the details of the situation including background of the incoming CEO and circumstances that lead to the transition.

Methodology Secondary research

24

0.3% 3%3%

33%61%

SouthAmerica

BRIC

MiddleEast/Africa

Europe

NorthAmerica

§  To further explore the value-at-risk associated with a CEO transition, FTI Consulting conducted primary research among institutional investors.

§  Using an online survey format, FTI Consulting solicited feedback from the investment community to better understand the extent to which CEO reputation in general, and leadership changes in particular impact investment decisions and therefore enterprise value.

§  The research was conducted globally, covering a cross-section of countries represented by the sample set.

§  In total, FTI Consulting solicited feedback from 358 portfolio managers and analysts across 37 countries. At 95% confidence margin of error is +/- 5.17%.

Methodology Primary research – global investor survey

Survey demographics – by region

53%

18%

7%

22%

0% 50% 100%

<1B

Between1Band5B

Between5Band10B

>10B

Survey demographics – by AuM

25

Contact:

Elizabeth Saunders

Americas Chairman, Strategic Communications

FTI Consulting

T: +1.312.553.6737

Elizabeth.Saunders@fticonsulting.com

Bryan Armstrong

Managing Director

FTI Consulting | Strategic Communications

T: +1 (312) 553-6707

Bryan.Armstrong@fticonsulting.com

David Roady

Senior Managing Director

FTI Consulting | Strategic Communications

T: +1 (212) 850-5632

David.Roady@fticonsulting.com  

26

Mark McCall

Americas Head of Strategic Communications

FTI Consulting

T: +1.212.850.5641

Mark.McCall@fticonsulting.com