More ASX 200 CEOs being forced out for ESG reasons
A growing number of ASX 200 chief executive officers are being forced to leave the office on the back of ESG pressures. Such moves can however come with a financial backlash, warns a new Kearney report.
The ASX 200 saw 41 forced CEO departures between 2011 and 2016 – 37 of which were pegged on poor financial performance of their company. In the last five years, sub-optimal financials have pushed 33 CEOs to exit, while the number of departures from non-financial reasons has increased four-fold to 19.
Kearney explored the reasons for this shift. “There is no evidence that today’s CEOs are markedly deficient in competence and character. They are, however, held to new and higher standards,” explained Sydney-based Kearney partner Alasdair Johnston.
Front and centre is the growing focus – across business, government and society – on environmental, social and corporate governance (ESG) factors. Within this broad fore is a host of contemporary driving forces such as diversity, equity, inclusion, freedom from abuse and harassment, social responsibility and sustainability – among several others.
Some CEOs are in direct violation for these principles, and as a result an increasing number have been shown the door for such considerations.
That said, even less direct involvement in transgressions is now enough to be shown the door. “CEOs are increasingly vulnerable to being sacked for turning a blind eye to a toxic corporate culture, or for failure to prevent socially irresponsible or unethical conduct by employees,” noted Johnston.
An example is the April 2021 ousting of Francesco De Ferrari – CEO of ASX-listed wealth management giant AMP – for the company’s handling of sexual misconduct allegations against a senior leader. His departure was preceded and followed by a steady decline in AMPs share price – a common outcome of such a scenario according to the researchers.
Financial impact
Exits for voluntary reasons usually cause a spike in share price, as natural turnover in leadership signals a healthy operation. Forced exits for financial reasons also cause a monetary boost – spurred on by optimism around a fresh approach.
“In contrast, a company’s share price tends to suffer in the wake of an involuntary, non-financial CEO departure, underperforming the ASX 200 index by an average of nearly 8 percentage points one year post-announcement,” explained Kearney’s Sydney-based partner Gerd Schenkel.
“When a CEO is forced out for ESG reasons, investors may fear that there are deeper structural flaws in the organisation that may take longer to correct than pure financial performance issues,” he added. This is a message that company’s want to avoid at all costs, but are struggling to do so. Per the researchers, companies need a paradigm change.
ESG performance needs to be put at par with all other corporate goals – complete with thorough risk management frameworks, regular feedback cycles with consumers and shareholders, and a personal commitment from leaders to lead by example when it comes to ESG adherence. A strong set of core principles is needed, and even the smallest of transgressions should be addressed to foster a stable and responsible business.
