Is Stephen Hester worth 2 billion pounds?
Royal Bank of Scotland (LON:RBS) 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.
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5 comments
As Marben says, it isn't just the loss of Hester. There is plenty of room to doubt the competance of the Board and their motives for the move - and IMO forcing Hester out is a massive gamble.
As to whether he was "underpaid" I think he was - or, more accurately, he was underpaid in practice because of unreasonable and unjust political pressure on him to waive some of the money he was entitled to. As a result, it seems pretty clear to me that a man who has been legged over twice by his employer (and the Government) ....and who has separated from his wife thanks (no doubt) in part because of putting the job first......wasn't that keen to commit to a further 5 years of more of the same!
Why would anyone sane want the job when they have been badly treated and it has come at a considerable personal price?
As a result I expect that the next incumbent will actually trouser substantially more than Hester managed to....though doubtless mostly in the form of an equity kicker rather than the headline-grabbing base salary. And, whether that will be better for shareholders, I think there is room for the market to doubt - even to the tune of several billions of pounds of market cap!
I'd pretty much agree with all of that. In guess everything else I'd want to say is wrapped up in my reply to Marben here.
There is one point that may be overlooked here. The £2bn doesn't simply reflect the loss of Hester. It also reflects concern about the degree of government interference in the company. The market is coming to realise that the govt. will force the company to do what is in the government's best interests, which are not necessarily shareholders' or the company's best interests. Taking that into consideration, £2bn may prove to be a very modest diminution in value.
There are many other issues which underline Hester's exit, but really my point is that for all but the very sharpest and quickest of investors, they should mostly be ignored. What if a month from now there's a decision which makes it look like RBS will be run for the benefit of shareholders? Then the £2 billion may be added back on to the market cap.
And 6 months after that another decision may again reverse that feeling. In my opinion this is all noise and not is generally random and unpredictable (as was Hester's departure). Investing based on random and unpredictable events is not a winning strategy for most investors.
However, for those who are plugged in enough and can consume and process enough of this sort of information fast enough to profit from it, good luck to them!
The bottom line here is that Hester's departure has created an unexpected and high degree of uncertainty - which is why the share price fall is justified.
There is a massive premium now on making "the right appointment". The problem with that is that, IMO (as someone who has seen a number of bank CEOs working at close quarters), the list of good (and, importantly, market-credible) candidates is not all that long.
Whether one likes Hester, thought he was overpaid....or whatever...... it is undeniable that he did an excellent job as a "safe pair of hands" in an unprecedentedly difficult situation. He has earned a good deal of "street cred" in so doing. It will probably be the end of 2014 before the market can safely conclude that his replacement was a good one - if, indeed, he/she is.
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