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CEOs will often tell you they don’t focus on their share price.
Their job, they say, is to run the best business they can with the best strategy for the times. Get your strategy right, and your share price will follow.
The board of services and manufacturing company Boart Longyear seems to disagree.
In a shock announcement yesterday, the company said it was turfing out its chief executive Craig Kipp, a man known for his operational mastery who led the global company to a record half-year profit only a month ago and an 89% net profit increase six months before that.
In his place, a spokesperson said, it hoped to appoint someone with more experience in “engaging the market”.
The market was Kipp’s Achilles heel. Despite his winning strategy, the company’s share price has remained stubbornly low during his tenure, and a month ago, took a massive dive after he plainly stated the extent of the mining slowdown.
Boart Longyear is a maker of exploratory mining drills, and its fortunes are closely tied to commodities markets. The company was owned from the 1970s by miner Anglo American, and it was sold to private equity in 2005. By 2007 it was owned by Macquarie Bank, which listed it on the ASX.
At an investor briefing in August, Kipp, its CEO since 2009, laid out the facts.
“Our view is that the market has either plateaued or peaked,” he said. “I would almost call it a pause as you try and figure out where you’re going to get the next return for your dollar if you’re a mining company.”
He announced a reduced revenue forecast of $US2 billion – down from the previously-expected $US2.3 billion.
The share price slumped 36%, and it hasn’t recovered.
Boart Longyear reportedly told analysts yesterday that Kipp wasn’t sent packing because of his strategy. It was about the share price.
Ben Le Brun, a market analyst at optionsXpress, says Kipp was a victim of his own honesty.
“You’ve got a responsibility as a CEO to your shareholders to be as optimistic and positive as possible,” he says. “When Kipp came out with his outlook statement, he gave dire warnings for what the company could expect in the future.
“Even though they achieved close to record results, it was the low-point of earning season for me. He put figures on the negativity.”
Le Brun says it’s a difficult balancing act for CEOs, as the market generally prefers openness and honesty. But a little optimism goes a long way.
“Most CEOs, if facing negative or pessimistic circumstances, will either say nothing, or try and maintain some optimism. Craig [Kipp] just came out and said ‘we’re downgrading our earnings’, and put all these figures on it. Those figures were still only his best guess. That absolutely killed the share price.”
“Certainly if I was a shareholder, I wouldn’t have been impressed with what he had to say.”
But that doesn’t mean CEOs should clam up about market conditions, Le Brun adds. The leaders of companies more often get called out for not being transparent enough, he says, citing recent transparency issues at miner Fortescue and the shock earnings downgrade at insurer QBE last year.
“We like to know as much as possible about the business and what goes on behind the scenes, as well as being kept abreast of situations. Management is often called out for not being as open and transparent with the market as they should be.”
An aspect of this could also be read into Kipp’s conduct. As recently as May, he was optimistic about his company’s future. Changing his tune so rapidly was perhaps part of the reason the stock was ravaged as suddenly and as savagely as it was.
Forewarning can help stop such sudden price jumps, says Martin Lawrence, from boutique proxy adviser firm Ownership Matters.
“The thing the markets most smash a stock for is unexpected bad news,” he says.
“Sometimes, that really terrible news might, from management’s perspective, not be so unexpected at all. But if the market is getting excessively optimistic, it’s a company’s job to manage expectations.”
But that is easier said than done, of course.
Peter Esho, chief market analyst at Citi Index, says he feels for the CEOs of listed companies, who have to manage a myriad of concerns.
“It’s always sensitive. The CEO is trying to balance the mood of the market, the realities on the ground in terms of the business, their clients, and the sensitivities of the board. It’s a very, very tough task.”
Esho thinks Kipps’ most recent communications with the market are unlikely to be the sole reason for his dismissal, even if they were significant. Boart Longyear could soon be a takeover target, and that may have factored into the board’s consideration.
“This is a very diverse business,” Esho says. “It’s both a service and a manufacturing business. It’s globally diversified, and usually when the board loses trust for a business like this, it requires immediate action.”
Keeping the market on-side: How to avoid Kipp’s predicament
Asked how CEOs can make sure they keep the market on-side, and avoid Kipp’s predicament, Esho says “skin in the game” – personal shareholdings by executives – is very important.
“When CEOs have a large vested interest through shares – not necessarily through incentive mechanisms but through good, old-fashioned equity – that’s a very good incentive.”
The things that make CEOs respected by the market are very similar to those that make them successful in business.
“Honesty is also very important, and some of the best CEOs I’ve met use the words ‘I don’t know’. When you meet a CEO who says they don’t know to broad questions, that’s usually a sign that they’re honest,” Esho says.
“Reputation is also key: how they’re perceived amongst their peers and their competitors. Some of the best CEOs are held in very high regard even by their competitors.
“And more often than not, when somebody has been and grown with the business for a while, that tends to be a good sign. What comes to mind is the Domino’s CEO, Don Meij, who started at the bottom and is now running the business.”
Esho says it’s very rare for all these qualities to be present in the one CEO, but when they are, the business is in good hands, and the market will recognise that.
He adds that in his experience, communication is overstated as a skill needed to impress the market.
“There are very good communicators who aren’t good managers at all. Communication with staff and clients is very important. Communication with the market, it’s important, but it’s not one of the main things.
“I’ve met a lot of good company managers, a lot of good CEOs, who don’t have the polish that you would expect for a listed company, but their value creation has been outstanding. And I’ve seen the opposite.”