Who leaves? Why? So what?
- Analysis model helps investors to tell whether a CEO has been forced to leave
- Stanford University investigates capital market relevance
The CEO resigns “to spend more time with the family”. Then you know: If the loved ones at home have to justify the move, the manager was probably fired.
Certainty about who took the initiative to separate and how much pressure was exerted on the manager can only rarely be gained. This also applies if the company emphasizes that the manager leaves “at his own request”. Possibly he was offered the opportunity to resign “voluntarily” before being pushed out in disgrace. As Goethe’s Erl-King says: “And if you’re not willing, my force I’ll employ.”
There is also no relying on “people familiar with the matter” who tell journalists “what really happened” in order to influence reports in their favor.
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.
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.
“[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.
The Push-out Score cannot fathom what really happened when the CEO resigned. No one can determine that. If ten neutral witnesses would tell truthfully and independently what happened, you would hear ten (at least slightly) different truths. And even if the rapporteur himself were a witness to the events, would he really know what really happened?
We never know the whole story. We know what people say and what they do. We don’t know what they think. Even if we see with our own eyes how the CEO is literally brought to the door and defends himself with hands and feet in the truest sense of the word (yes, there are also such extreme cases), it is possible that he has intentionally provoked the firing (“if you want me gone, you will have to fire me”) and the observer gets to see nothing else but 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.”