- Analysis model helps investors to tell whether a CEO has been forced to leave
- Stanford University examines capital-market relevance
The CEO resigns “to spend more time with his family”. With that wording, you know the score. If loved ones at home must serve as justification for the CEO’s move, the executive was probably fired.
Most CEO departures are less clear-cut. Managers may be forced to resign “voluntarily” and are paid to leave quietly. Both the board and the departing CEO may have valid motives for concealing who actually took the initiative for the separation and how much pressure was put on the leader to leave.
When it comes to executive changes, you should not blindly trust “people familiar with the matter” and “people familiar with the board’s thinking.” While anonymous sources may provide valuable insight, they cannot be held liable for their statements and must be considered with caution. They are not primarily committed to the truth. First and foremost, they follow their own interest and may be inclined to give biased information.
We can, however, attempt to arrive at a reasonable assessment of the likelihood of a forced departure by systematically evaluating observable evidence. That’s why exechange developed the Push-out Score™ analysis model, which helps in gaining more clarity.
Unlike scientific models that strictly categorize CEO departures as forced or voluntary, the Push-out Score produces a score on a scale of 0 to 10, representing the confidence level that the CEO was pressured to leave.
A score of 0 indicates that it is “not at all” likely that the executive was pressured to leave, and a score of 10 indicates that an involuntary departure is “evident” — for example, in the event of termination for cause or after an open dispute.
Since the probability of a forced resignation can only be approached indirectly, the Push-out Score is based on proxy variables.
The Push-out Score incorporates publicly available data from nine categories:
- Form of the management-change announcement
- Language in the announcement
- Age of the departing executive
- Notice period (time between announcement and departure)
- Share price development
- Official reason given
- Circumstances of the management change (e.g., firm and industry performance, peer group performance, severance payment),
- Succession (e.g., external vs. internal, permanent vs. interim solution).
If the data generate a warning signal, the respective category is assigned a value of 1; if not, the value is 0. The Push-out Score is equal to the sum value of these nine categories. When the executive is openly pushed out (e.g., “terminated for cause”) or when there is absolutely no doubt that the manager left the position due to pressure, then 10 points are given.
The algorithm-controlled model was introduced at the end of 2016 on the website exechange.com and quickly gained attention in the United States and the United Kingdom.
Corporate governance experts from Stanford University (David Larcker and Brian Tayan) and Harvard University (Ian Gow) have investigated the model and found that Push-out Scores are positively correlated with stock market volatility.
Push-out Scores provide informative assessments
“[A] company’s stock price volatility increases with increasing Push-out Score. That is, investors react in a fairly muted fashion to CEO and CFO departures that receive a low Push-out Score but react more dramatically – both positively and negatively – as Push-out Score increases,” the researchers wrote and concluded: “A positive reaction might indicate that shareholders approve of a decision to push out the CEO because of the potential for operational improvements or future sale of the company. … On the other hand, a negative reaction to a high Push-out Score situation might indicate that shareholders view a forced termination as evidence of deeper operating, financial, or governance problems, or that shareholders disapprove of the decision to fire the CEO.”
On August 14, 2017, The Wall Street Journal featured the Push-out Score on the front page, followed a day later by The Times of London and the Harvard Business Review in the November-December 2017 issue.
In 2022, David Larcker, Brian Tayan (both of Stanford Graduate School of Business) and Edward Watts (of Yale School of Management) analyzed a sample of 1,399 CEO turnover events at Russell 3000 companies over the five-year period 2017 to 2021, including Push-out Scores. The researchers conclude: “We find a high association between stock-price performance and the likelihood that a CEO is pressured to leave. This indicates that Push-Out Scores provide informative assessments of whether a termination event is involuntary. It also indicates that boards might be more likely to hold CEOs accountable for performance than prior studies suggest.”
Benefits and limitations
While the Push-out Score has many benefits, it also has its limitations. Of course, even the best analysis model cannot fathom what exactly occurred during a CEO departure. The fact is that no one can unambiguously describe such a complex event. If 10 neutral witnesses were to truthfully and independently report what exactly happened, you would hear 10 (at least slightly) different truths. And even if the reporters had witnessed the event themselves, would they really know the score?
Residual doubt will remain. Things are not always what they seem. We never know the whole story. We know what people say and what they do. We don’t know what they think and what they intend. And we don’t know for sure what is real and what is fake. To give an extreme example: Even when we see the CEO being escorted to the door, fighting tooth and nail, it may be an intentionally provoked firing — or just a big show.
Exiting with greatness and humor
There are also some management changes where there is no need to decode the background using the Push-out Score. This is the case when the CEO has strength and greatness to take the defeat, which can also be liberating, with a dash of humor.
Groupon CEO Andrew Mason said: “After four and a half intense and wonderful years as CEO of Groupon, I’ve decided that I’d like to spend more time with my family. Just kidding — I was fired today.”