Is a Death in the Executive Suite the End of a Company?

Is the top executive at your company healthy?

Perhaps the answer isn't as important as you'd imagine. Recent research has found that the sudden, unanticipated death of a CEO tends to have a damaging effect on a company's fundamentals. A look at a few recent, high-profile examples seems to contradict this, however.

Fundamental volatility?
The sudden demise of a sitting chief executive was one of the main events tracked in the research of a paper bluntly titled "Do CEOs Matter?" written by Morten Bennedsen of the Copenhagen Business School, Francisco Perez-Gonzalez of Stanford University, and Daniel Wolfenzon of Columbia University.

The trio's research found that such deaths (along with those of a CEO's family members) "are strongly correlated with declines in firm operating profitability, asset growth, and sales growth." This was measured over periods of two and four years following the unfortunate event.

But recent examples seem to contradict these findings. In early 2012 Steve Appleton, the longtime CEO of semiconductor specialist Micron Technology (NASDAQ: MU  ) , perished in a plane crash. In that fiscal year, Micron recorded an uncharacteristic net loss. Given that Micron operates in a volatile, highly price-sensitive segment, the company's results tend to seesaw. Regardless, although it hasn't yet managed to reach some of the profitability levels it clocked during Appleton's tenure, Micron posted a solid top line in fiscal 2013 and has managed to increase profitability across its most recent three quarters.

So rather than cratering in the two years since its CEO's passing, Micron Technology appears to be getting along rather well without his guidance.  

This could well apply to longer stretches of time following a leader's death. One incident that gives us plenty of space to analyze longer-term impact is McDonald's (NYSE: MCD  ) , which lost sitting CEO Jim Cantalupo in 2004. Comparing its financials since that unfortunate event reveals that annual net income is up by nearly 150%, while revenue is more than 50% higher.

The stock doesn't mourn
That's all well and good as far as a company's underlying financials go. But what about the biggest concern of many investors -- share price? In the cases of Micron Technology and McDonald's, neither company has suffered in terms of market value.

Since Appleton's untimely exit a little over two years ago, Micron's shares are up more than fourfold. On the day of the death of McDonald's Cantalupo, the company's stock closed at $26.75. One year later, it traded at over $30. As of this writing -- a little over 10 years since the event -- McDonald's share price stands at almost $100. That represents a gain of nearly 280% -- an even more pronounced rise than the company's hefty top- and bottom-line increases.

A more recent incident is the sudden passing of Lorenzo Zambrano, CEO of Mexico-based construction materials powerhouse Cemex, this past May. Since then, the firm's share price is up by 4%.

Cooking up a succession plan
Analyzing the fallout from these shocking events raises a question: What happens when a CEO's passing is entirely expected by the market?

In the case of Apple (NASDAQ: AAPL  ) , its widely admired CEO, Steve Jobs, passed away in October 2011 due to pancreatic cancer, a disease he had been fighting for many years.

Although Jobs was the company's main brain and guiding light, his death didn't halt the relentless upward march of Apple's stock. That's due in no small part to solid financials owing to the enduring popularity of the company's iDevices.

What also helped was a smooth and uncontroversial transition to new leadership. Jobs stepped down in late August of that year, anointing Tim Cook as his replacement CEO. In the days following the accession of the new boss, the stock climbed notably in price.

Despite a bearish period starting in September 2012 and lasting well into 2013, Apple's stock is up about 80% since the succession was announced. 

Life goes on
At least in these recent cases of CEO departures, companies seem to rebound and recover from such difficult events rather well. So although we should all be concerned about the longevity of top management at our companies, it's probably more important to worry about the durability and underlying strength of the enterprise, rather than the person who occupies the executive throne.

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