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BP's Management: Will A Change Do The Company Good?
BP (NYSE:BP) announced that it will replace current CEO Tony Hayward, a move the company hopes will calm the anger over the oil spill in the Gulf of Mexico. Since the oil spill, BP's stock has lost more than 35% of its value, and its reputation has been immeasurably damaged. Although this move has been hypothesized in the media for some time now, the company hopes investors will react positively to the news. Let's take a look at other companies that have made changes at the top of management during difficult times and investors' reactions to these changes.
In Picutres: 8 Signs Of A Doomed Stock Past CEO Replacements
Pharmaceutical giant Merck (NYSE:MRK) replaced its CEO, Ray Gilmartin, in 2005 after an investigation into its drug Vioxx turned up evidence that the company was aware of some of the cardiovascular side effects the drug may have caused but failed to disclose them. Gilmartin initially took a hard stance on the investigation, insinuating that the cardiovascular link didn't exist and was even quoted as saying that his wife took the drug, thus proving that he had no knowledge of any dangerous side effects. The investor community did not believe the company and Gilmartin did little to soothe investor concerns as the stock continued to plummet.
MRK's board of directors finally took action months after the initial negative reports began to surface. In a move widely expected by the investor community, the company named Richard Clark as CEO on June 6, 2005, although the company claimed the CEO swap was unrelated to the Vioxx controversy. By the time the new CEO was announced, the stock had already bounced off its lows, gaining 19%. Directly after the announcement, the stock continued on a downward trend and tested its prior lows before heading on an upward trend for the next 27 months.
UnitedHealth Group (NYSE:UNH) faced similar media pressure when news broke that its CEO, William McGuire, approved "backdating" of its employee stock option program, a practice in which a company chooses to price stock options low in order to maximize the profits for executives who exercise them. There was a gray area in the accounting regulations at the time, so the backdating was not illegal, but negative press surrounded these issues anyway because of their negative impact on investor returns. McGuire was beloved by the investor community for his vision and successful implementation of strategies to grow UNH into one of the most profitable health insurers in the United States. So, when this scandal broke and a weekend board meeting resulted in McGuire's announced retirement, the stock's reaction was expected to be strong.
The stock had already been on a downward trend prior to the announcement and continued to lose another 4% before gaining 8% just four days after the announced change. The new CEO, Stephen Hemsley, previously the COO, had been known to the investor community, easing fears of a total regime change. In the end, because the investor community felt comfortable with the selection, the stock reacted favorably. (For more, see CEO Savvy And Stock's Success Go Hand In Hand.)
In 2009, Bank of America (NYAE:BAC) weathered the criticism of investors and government officials alike about its failure to disclose an agreement it made to pay bonuses to executives at Merrill Lynch after the company was acquired by BAC in 2008. Although BAC agreed to pay a $33 million fine and neither admitted nor denied the charges against it, the media was relentless. Finally, the bank's board succumbed to the pressure and BAC's chief, Ken Lewis, announced his retirement in September of that year. He was to be replaced by an insider, Brian Moynihan.
Although the move to replace the CEO was widely expected, speculation had swirled before Moynihan was named that the bank would look for an outsider to be at its helm, a move many believed would soften Main Street's and the government's hard stance against the bank. Unfortunately, the naming of an insider as the new CEO did little to change investors' mind about the company, and the stock continued to move sideways for the next couple of months.
Conclusion
These three examples show that investors' reactions to changes at the top differ depending on their expectations of the change and the selection of the replacement. Will investors react positively to a change at BP with the replacement of Hayward? Based on the arguments above, I think it will all depend how Robert Dudley, Hayward's successor, is perceived by investors.
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In Picutres: 8 Signs Of A Doomed Stock Past CEO Replacements
Pharmaceutical giant Merck (NYSE:MRK) replaced its CEO, Ray Gilmartin, in 2005 after an investigation into its drug Vioxx turned up evidence that the company was aware of some of the cardiovascular side effects the drug may have caused but failed to disclose them. Gilmartin initially took a hard stance on the investigation, insinuating that the cardiovascular link didn't exist and was even quoted as saying that his wife took the drug, thus proving that he had no knowledge of any dangerous side effects. The investor community did not believe the company and Gilmartin did little to soothe investor concerns as the stock continued to plummet.
MRK's board of directors finally took action months after the initial negative reports began to surface. In a move widely expected by the investor community, the company named Richard Clark as CEO on June 6, 2005, although the company claimed the CEO swap was unrelated to the Vioxx controversy. By the time the new CEO was announced, the stock had already bounced off its lows, gaining 19%. Directly after the announcement, the stock continued on a downward trend and tested its prior lows before heading on an upward trend for the next 27 months.
UnitedHealth Group (NYSE:UNH) faced similar media pressure when news broke that its CEO, William McGuire, approved "backdating" of its employee stock option program, a practice in which a company chooses to price stock options low in order to maximize the profits for executives who exercise them. There was a gray area in the accounting regulations at the time, so the backdating was not illegal, but negative press surrounded these issues anyway because of their negative impact on investor returns. McGuire was beloved by the investor community for his vision and successful implementation of strategies to grow UNH into one of the most profitable health insurers in the United States. So, when this scandal broke and a weekend board meeting resulted in McGuire's announced retirement, the stock's reaction was expected to be strong.
In 2009, Bank of America (NYAE:BAC) weathered the criticism of investors and government officials alike about its failure to disclose an agreement it made to pay bonuses to executives at Merrill Lynch after the company was acquired by BAC in 2008. Although BAC agreed to pay a $33 million fine and neither admitted nor denied the charges against it, the media was relentless. Finally, the bank's board succumbed to the pressure and BAC's chief, Ken Lewis, announced his retirement in September of that year. He was to be replaced by an insider, Brian Moynihan.
Although the move to replace the CEO was widely expected, speculation had swirled before Moynihan was named that the bank would look for an outsider to be at its helm, a move many believed would soften Main Street's and the government's hard stance against the bank. Unfortunately, the naming of an insider as the new CEO did little to change investors' mind about the company, and the stock continued to move sideways for the next couple of months.
Conclusion
These three examples show that investors' reactions to changes at the top differ depending on their expectations of the change and the selection of the replacement. Will investors react positively to a change at BP with the replacement of Hayward? Based on the arguments above, I think it will all depend how Robert Dudley, Hayward's successor, is perceived by investors.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
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