Rushing a major strategy announcement can be a mistake for new CEOs

When a new CEO takes over at a firm, it creates uncertainty for important stock market participants such as financial analysts who meet regularly with them and influence the investing patterns for the world’s largest institutional investors. They wait eagerly for the new leader to reveal their first major strategy and the future direction of the firm.

Past research offers conflicting views on whether a swift plan or a patient, deliberate approach is better.

A new study from the University of Notre Dame introduces a concept called “new CEO strategic action speed,” which represents the number of days a new chief executive takes to announce the firm’s first large-scale strategic action.

How analysts respond to new CEO strategic action speed depends on the circumstances into which the chief executive is thrust, according to lead author John Busenbark, the Mary Jo and Richard M. Kovacevich Associate Professor of Management & Organization at Notre Dame’s Mendoza College of Business. Busenbark’s findings in the article titled “Moderately Fast and Furious: A Screening and Behavioral Theory of New CEO Strategic Action Speed” are forthcoming in the Academy of Management Journal.

Along with Robert Campbell from the University of Nebraska-Lincoln and Diego Villalpando from the University of Texas at Arlington, Busenbark shows that if the CEO’s transition was fairly routine, analysts appreciate information sooner than later so they can glean a better picture of the firm’s prospects and provide that information to their clients. But if the CEO was appointed during a period of turmoil or has limited knowledge of the company’s structure, analysts appreciate the CEO taking a little more time to orient themselves to the role and demonstrate that they understand the demands the company faces.

“After that period of time — around 35 days on average — analysts begin to react unfavorably to longer strategic action speeds; after all, their patience only extends so far,” Busenbark said.

Yet, the majority of new CEOs wait more than 200 days to reveal their first major strategy, which is far longer than reasonable in the minds of vital capital market information intermediaries like financial analysts.

The study found that when a company is in trouble — specifically when the last CEO was fired, the new one is an outsider or performance has been poor — analysts prefer a cautious approach, and moving too fast or too slow is seen as a risk. However, if the company is already doing well and the new CEO is an insider, analysts have no patience for delays — the faster the CEO acts, the better.

“In other disciplines and contexts, this type of speed is viewed as key information,” Busenbark said. “Political scientists, sociologists and journalists often note how people form opinions about new U.S. presidents based on how quickly they announce their major policy decisions. Much like new presidents, new CEOs are often expected to balance altering the firm’s strategic trajectory with maintaining the core elements the firm already does well. Yet, unlike the incredible academic scrutiny on how long presidents take to make those types of decisions (typically within the first 100 days), there has been only passing conjecture in the organizational sciences about what it means for new CEOs to make quicker or slower decisions after ascending to their role.”

The researchers gathered data from several sources: a list of new CEO appointments between 2005 and 2019, strategic action announcements pulled from various business newswires, and financial analyst reactions found in academic databases.

“We even dug through thousands of earnings call transcripts for stories and found that analysts are typically eager for clues about the new CEO’s plans,” Busenbark said. “But questions about where the firm is heading often get redirected, so analysts usually have to wait much longer than what they believe is reasonable for information.”

The study notes, “On a call introducing Léo Apotheker as Hewlett-Packard CEO, one analyst asked, ‘Can you comment on when … we can expect your readout and early action items on the company?’ Similarly, on Joseph McGrath’s first earnings call as Unisys CEO, an analyst inquired, ‘When can we expect to see new major [actions]?’”

Along with advancing management theory, the study serves as a practical guide for new CEOs aiming to make their firms more successful on the stock market.

“New CEOs in turbulent situations would be wise to take a bit of time to gather and analyze information,” Busenbark said, “but they should still be cautious of waiting as long as they usually do since periods greater than a month tend to agitate analysts and invite more unfavorable evaluations.”

Contact: John Busenbark, 574-631-1735, jbusenba@nd.edu