The best bosses

Explanations might get off to a decent start if bosses could show that shares in the companies they run perform well during their time in charge. In a sense, that’s basic stuff. After all, a key part of the argument that defends bosses’ pay is that highly motivated chiefs will bring rewards to shareholders, too. Yet the notion is rarely tested; not for individual bosses – unless their pay is especially high, their performance particularly lousy, or both – and more rarely still for FTSE 100 chief executives in aggregate.

However, we have crunched the share-price performance data for all 100 of the Footsie’s chiefs during the time they have been the boss and have found that they produced excess returns. The bald figure is that, on average, a Footsie boss produces returns that grow 3.9 per cent a year faster than the underlying market where our benchmark was the FTSE All-Share index.

More striking still, chief executives seem to get into their stride as they stay in the job. So those who have been in the hot seat longer produce better performance. Or, at least, remove from the calculation all those bosses who have been in their post for less than 2½ years and the remaining 62 of them, who, on average, have been in charge for seven years and four months (7.3 years), have produced returns that outgrew the market by 7.1 per cent a year.

The methodology explaining how we arrived at those figures is explained in the box, Working out the score. But it’s worth pondering what a 7.1 per cent excess return means. Quite a lot, as it happens. Hold an asset for 7.3 years while its value compounds annually at 7.1 per cent and, by the end of the period, every £100 invested will have grown to £165.

Put that rate of return into context and it’s well worth having. True, there will be quite a few seven-year periods when the value of London’s equities market grew faster than 7.1 per cent a year. But also – and certainly since the turn of the millennium – there will be many such when it didn’t. For instance, in the most recent 7.3-year period, starting in July 2007, the rise in the All-Share’s value has compounded at just 0.6 per cent a year.

But, of course, we have been talking about ‘excess’ returns over the London market because we wanted to isolate the performance of Footsie bosses from the generally-helping hand that the market lends them. Include that helping hand, however, and returns are boosted further. Average share prices grew by 11.4 per cent a year compound in the 7.3 years for which those long-serving chief executives have been in charge. That’s enough to turn £100 into £220.

What’s most remarkable about this performance is that it’s there at all. After all, logic would indicate that, on average, the bosses of all of the FTSE 100’s companies should produce no excess returns at all. It’s true that convenience meant we used the All-Share index as the comparator rather than the FTSE 100. But that makes little difference since the 100 index accounts for 82 per cent of the All-Share’s value anyway. That means the two indices are pretty well the same. That being so, in aggregate, all the FTSE 100 companies comprise the index and the index can’t beat itself.

Carolyn McCall: a long-term leader

So why do we see excess returns when we average them after using a different start date for the relative share price of each company in the sample? (For example, returns for Geoff Drabble, the boss of rental group Ashtead (AHT), are based on the past 7.8 years he has been in charge, those for Richard Solomons at InterContinental Hotels (IHG) are based on the past 3.3 years and so on.) And why do those excess returns widen for those bosses who are well established in their job?

This is where fact gives way to speculation; though the more you look, the less likely it becomes that, in aggregate, the FTSE 100 bosses really do beat the market. First, however, let’s acknowledge that all sorts of guys – and just a few girls – clamber up the greasy pole to the top of a Footsie company. The table, In aggregate and on average, gives some details. As you would expect, as a bunch, the chiefs are comfortably into middle age. Their average age is almost 54½ and two-thirds of them are in their 50s. Just one boss has yet to hit 40 – Liv Garfield at water utility Severn Trent (SVT), who took over in April after a spectacular rise at BT. At the other end of the scale, two are eligible for a state pension – Peter Rogers, the boss of engineering group Babcock International (BAB), who is one of the top 10 long-term best performers, and Sir Martin Sorrell at marketing group WPP (WPP). However, input age against excess returns into a regression model to see if there is a likely link and nothing significant shows up. There seems to be no correlation between age and excess performance.

What makes a good boss?

Most of the other quantifiable elements of the bosses’ backgrounds don’t easily lend themselves to regression models. It’s simple – and interesting – to sort out the 100 by nationality and they are surprisingly diverse. Only 12 per cent of the bosses of the world’s 500 biggest companies, as measured by the Fortune Global 500, come from a different country to the one where their company is based. Yet for the FTSE 100 that ratio is 43 per cent. To spell it out – 43 of the Footsie’s 100 chief executives have a foreign nationality.

Given the UK’s background as a trading nation, its links with the Commonwealth and the common language it shares with the US and Ireland and you would guess that the ratio of foreigners among FTSE 100 chiefs would be higher than average. Even so, if we labelled those bosses from the English-speaking Commonwealth, the US and Ireland as ‘quasi Brits’, then we would still be left with 22 ‘real’ foreigners, which remains well ahead of the global average for big companies.

That this international diversity leads to superior performance looks unlikely. If anything, it’s more likely that the link runs the other way – that British bosses produce fatter excess returns than foreign bosses. At least all of the top 10 long-term leaders are British (see table). Of these, there are eight English and two Scots – Adam Crozier of ITV (ITV) and Keith Cochrane of The Weir Group (WEIR). Meanwhile, three out of the 10 long-term laggards are foreigners – Vittorio Colao, the Italian boss of Vodafone (VOD), Dalton Philips, the Irish boss of Wm Morrison Supermarkets (MRW), and Ivan Glasenberg, the chief of commodities trader and miner Glencore (GLEN). Mr Glasenberg is unique among Footsie bosses in having four nationalities – Australian, South African, Israeli and Swiss.

Great Scot: Adam Crozier of ITV

Similarly, take the whole sample of 100, which includes bosses in the post for as little as two months – statistically, there should be between eight and nine overseas bosses in both the top and the bottom 20. Yet foreigners underperform among the leaders – just four out of 20 – and are over-represented among the laggards – 11 out of 20. That may be more to do with the fact that, for reasons of global economics, mining groups are heavily represented among the poor performers and – partly because most have long-term South African and Australian connections – are more likely to be run by non-Brits.

Besides, if the performance of foreign bosses clusters at the bottom, it also clusters in the middle. As a result, the average position for them all is 55th. How does that stack up? Put it this way, the average value for the sum of 100 figures that are numbered one to 100 is 50. So we would expect a big sample of 43 of those numbers to have an average value close to 50. That means the average value for the positions of the 43 non-UK bosses, at 55, isn’t too far from where it should be. Yet there is no getting away from it, it’s an unimpressive result. The performance of overseas bosses is underwhelming.

As for the correlation between qualifications and performance, there is one intriguing indicator; but, most likely, any link is tenuous.

No surprises that the 100 are a talented lot. Almost all have a degree. There are 18 ‘Oxbridge’ graduates and – among the foreign-born bosses – a good representation from leading overseas universities. Perhaps predictably, given that business folk are supposed to prefer action to contemplation, their academic qualifications tend to be restricted to what’s necessary. So there is just one PhD among the 100 – Andrew Mackenzie, the Scot who took over the leadership of mining group BHP Billiton (BLT) last year.

Several have what might be labelled ‘the perfect CV’. Take, for example, one of the two old Etonians in the pack, Sebastian James, the boss of recently-merged electricals retailer Dixons Carphone (DC.). From Eton, Mr James – who is the third son of a hereditary peer – went to Magdalen College, Oxford and thence to INSEAD, mainland Europe’s most prestigious business school, for his MBA. After that it was management consultancy with The Boston Consulting Group, a move that brought him to retailing.

Sebastian James: the 'perfect CV'?

That MBA, however, might be a warning sign. At least the intriguing but unscientific indicator is that an MBA qualification is more liability than asset. Sure, there are more MBAs – 20 of them – among the 100 than there are accountants (just 12). Given the supposed British preference for financial engineers to run their companies, this, in itself, may be surprising. Yet the specific worry is that MBAs are over-represented among the long-term laggards and under-represented among the leaders. There are five MBAs among the 10 laggards and just one among the leaders. For accountants – and despite their lower number – the positions are almost reversed. Among the 12 accountants, five are among the long-term leaders and just two among the laggards.

Still, as we say, this is not scientific stuff. Besides, the best of the long-term leaders – Simon Borrows, who runs private-equity house 3i (III) – has an MBA (from London Business School). And an accountant – Ivan Glasenberg of Glencore – is the bottom of the long-term laggards. True, just to confuse matters, Mr Glasenberg is also a chartered accountant, the only chief among the 100 to have both qualifications. Then again, as we saw with regard to nationalities, Mr Glasenberg seems to have an excess of everything.

Equally unscientific, yet equally intriguing, the top two performers – Mr Borrows and Ashtead’s Geoff Drabble – are among the very few FTSE 100 bosses who don’t have a Wikipedia entry. The implication is that the best performance accrues to those who keep the lowest profile. That notion is re-enforced by others in the top 10. Andy Harrison at Whitbread (WTB), Keith Cochrane at Weir, Ian Gorham at Hargreaves Lansdown (HL.) and Babcock’s Peter Rogers don’t exactly get a lot of column inches.

A stroke of luck

Which brings us back to the correlation between good performance and time spent in the job. The reasons behind this are obscure. For starters, it’s not as if the new boss of a company gets to choose when he or she takes over. The appointment is made either because the predecessor chose to leave or was sacked. So if the appearance of a new boss means, on average, an uplift in share-price performance, that implies that the former boss left when performance was set to improve. That seems unlikely – after all, why would he? Alternatively, if he was sacked, then it indicates that the company’s board knew it was the right time to make that move That seems equally unlikely. Why would the board have such prescience?

True, when a new boss moves in – especially to a troubled company – then we would expect to see a fair bit of ‘kitchen-sinking’ up front, whereby provisions are made and losses taken, clearing the way for better performance in the future. If that scenario were widespread then we would also expect to see a bias towards recovery situations among the best-performing bosses. But that is not the case. Of the long-term leaders, only three bosses had to handle a clear-cut recovery plan – Simon Borrows at 3i, Geoff Drabble at Ashtead and Adam Crozier at ITV. At a push, we could argue that Carolyn McCall at easyJet (EZJ) and Richard Solomons at InterContinental Hotels (IHG) were also put in charge of recovery situations.

The more we look, however, the more we see that fate, chance, luck – call it what you will – enters the equation. The best-performing bosses tend to be the luckiest over a short period and the worst performing, the most unlucky over an equally short time. The table, Averaging out, puts this into figures by separating the performance of both the total 100 and the long-term sample of 62 into performance deciles (slots of one-tenth each). What emerges is a fairly consistent link between performance and time in the job, whereby the best and worst performance goes to those who have been the boss for the shortest lengths of time and average performance goes to those who have been the chief for an average length of time.

The connection is best shown in the pool of all 100. At the extremes of performance the bosses have clearly been in the post for shortest periods – an average tenure of 3.0 years for the top decile, who have generated average excess returns of 31 per cent a year; and a tenure of just 1.8 years for the bottom decile, whose average loss relative to the All-Share index is 27.4 per cent a year. Similarly, for the sample of 62 longer-serving bosses, it is significant that the best-performing decile has an average tenure of just 4.7 years, easily the shortest period of any decile in the sample.

This should offer some comfort to the bosses at the bottom of the pile, particularly supermarkets chiefs Mike Coupe of J Sainsbury (SBRY) and Dave Lewis at Tesco (TSCO). These two have both taken on tough challenges and have been punished by investors for doing so. Sainsbury’s relative performance is minus 55 per cent in the four months that Mr Coupe has been the boss and Tesco’s is minus 62 per cent in the three months since Mr Lewis arrived. At least these two can be fairly confident that, in time, their relative performance will improve (see table Best & Worst of the FTSE 100).

Similarly, at the top of the pile is Sebastian James of Dixons Carphone, whose shares have had a great run since the newly-merged group was formed in the summer. True, Mr James may deserve some credit for putting the merger together as he had been running Dixons since 2012. Even so, it’s a near certainty that in the long run his excess performance will average down.

And, like so many things in life, ‘averaging’ seems to be a dominant factor. Broadly, our findings show what statistics would predict – that in the long run share-price performance during the tenure of any boss will regress towards the average; that average time in the job will produce average performance.

From this, we might suggest that only those who have been in their post for longer than average and have produced above-average returns are doing something special. In which case, we should highlight Peter Rogers of Babcock, but also Aidan Heavey of Tullow Oil (TLW) and Simon Wolfson of Next (NXT). It may be ironic, therefore, that Mr Heavey has been under pressure to quit his post since Tullow’s share price started to falter badly in 2012; shareholders were especially upset to see him sporting an incredibly expensive wrist watch while the share price plummeted. Then again, closer examination may well show that even these three owe their success to just a few years of exceptional returns and the rest has been average.

Finally, let’s put this mystery to bed – why is it that, on average, Footsie chief executives seem to outperform their own index; that they generate excess returns when we use their length of service as the basis for the time series in our calculation?

Most likely, two statistical factors are coming to their aid. The first is a variation of what’s called ‘survivor bias’ whereby returns are distorted because the sample is based on the performance of winners and the losers are excluded. The winners we have used for our returns are the companies that make up the FTSE 100 index today. But perhaps we should have included some losers whose shares seem to spend forever tripping between the FTSE 100 and the FTSE 250 – the likes of Tate & Lyle (TATE) and Rexam (REX) – because of patchy performance. Include those from the time their bosses were hired and overall performance would have been dragged closer to the index.

Second – and more important – returns for the FTSE 100 are weighted by the market value of each component of the index. In contrast, the returns we have calculated are unweighted, so the contribution to overall performance of each component is the same – one hundredth. This matters since the share-price performance of just a few really big companies by market value has a disproportionately large effect on the index. Currently, for example, just five companies account for almost 29 per cent of the index’s weighted performance. And it just so happens that shares in really big companies have been performing badly for some years now. The effect is that – in comparative terms, anyway – the unweighted performance put up by the current crop of FTSE 100 bosses looks especially good. If we had applied the same weightings as the FTSE 100 index throughout – no small task – then, most likely, the bosses’ performance would have been dragged down to the market

Yet arguably this just illustrates the shortcomings of market-weighted indexes, which don’t have much relevance even to some institutional investors. When all is said and done, we still have – or seem to have – a simple investment proposition that looks like a supercharged form of index tracking. All an investor has to do is to buy shares in each component of the FTSE 100 when a new chief executive takes over and gradually build up an equally-weighted exposure to the whole index. Then, with patience, the nice returns will materialise. True, think of that as an investment hypothesis whose proof is still awaited. All that’s needed is a doctoral finance student looking for a project and willing to crunch a lot of numbers. Meanwhile, we will continue to monitor the performance of FTSE 100 bosses.

Best & worst of the 'core' 62

Best & worst of the FTSE 100

Source: Investors Chronicle *or from date of flotation/merger, if later