Britain's new bosses

This is an inherently precarious position, because of the need to please an extensive crew of stakeholders, from fellow directors to employees, equity and debt investors, and – increasingly – wider society. If they remain satisfied, the top boss can hope to enjoy a lengthy and often lucrative tenure. But some will be replaced after mergers or takeovers. And others will find themselves unceremoniously dismissed, if financial performance hasn’t passed muster or evidence of serious missteps emerge. When push comes to shove, the man who answers to the board (and yes, most remain men) can easily become ‘man overboard’.

Bye-bye stocks

Is the job getting harder? A record number of corporate leaders left their posts last year, according to a recent report by PwC, which found that turnover among chief executives of the world’s 2,500 biggest companies climbed to 17.5 per cent during 2018. This was three percentage points higher than in 2017, and above the norm for the past decade.

In the UK, the exit rate certainly appears to have accelerated. Since the start of 2019, 18 chief executives of FTSE 100 companies have either stepped down or announced plans to do so. Three high-profile departures were confirmed in the first week of October alone. Tesco’s (TSCO) Dave Lewis will leave the supermarket chain next summer, having joined in 2014. BP’s (BP.) leader, Bob Dudley, will retire in 2020 after a decade at the oil major. Imperial Tobacco’s (IMB) chief executive, Alison Cooper, will also say goodbye once a successor is found, after 20 years in total at the tobacco giant, including nine as CEO.

Hello, goodbye, hello, goodbye

But departures also pave the way for arrivals, and a chance for existing (or potential) investors to reflect. In this feature, we look at the prospects and hopes for some of the newest brooms among London’s blue-chip stocks. In each case, we’ll ask what investors want from them, and whether this means continuity or change. Which of the leaders have already set out their stall? And what might their backgrounds mean for the tasks at hand?

Ultimately, investors might question how much difference one person can make to companies of such size and scale – and, to revisit our nautical analogy, how far they’ll be allowed to rock the boat in a bid to drive improvements. Too much upheaval and they might capsize. Too little, and they might fail to stay afloat anyway.

Changing times call for changing qualifications, although previous experience within a company appears to have garnered increasing popularity as a CV checkpoint. Indeed, of the five new CEOs under review within this article, three were internal hires. The trend chimes with the findings of recruiter Robert Half’s latest FTSE 100 CEO Tracker, which noted that nearly half of all current chief executives were promoted from within the company, up from 30 per cent in three years. The survey also found that leaders with a financial background are on the up, as are those with technology experience.

It takes time for bosses to embed themselves in their organisations, and for investors to gauge their reception. That said, the last batch of newly appointed CEOs doesn’t appear to have fuelled a positive upswing in investor sentiment; of the seven FTSE 100 constituents that have welcomed new leaders this year, only two have seen share price increases since the executives’ respective starting dates (see chart). Time will tell whether that has left them galvanised or dispirited. HC

Alison Rose – RBS

In one key respect, last month’s formal appointment of Alison Rose as the Royal Bank of Scotland’s (RBS) successor to Ross McEwan is a watershed moment for the City. For the first time, one of the country’s major high-street lenders will be run by a woman. Symbols like this matter, particularly when a sector’s cultural reputation has – quite deservedly – been in the dock for so long.

Then again, investors need not care about symbols to cheer the development. According to research from the International Monetary Fund, “a higher share of women on the boards of banks and financial supervision agencies is associated with greater stability”. A female touch (and whatever this means within your average banking board) is, arguably, a net positive.

Then again, RBS’s board would have struggled to find a stronger continuity figure. To put it mildly, Ms Rose is a company lifer. In 2012, two decades after first joining the NatWest graduate scheme, she was appointed to head the Europe, Middle East and Africa arm of RBS’s Markets & International Banking (M&IB) division – dubbed the “Men in Black” by bank insiders. Two years later she joined the executive committee, and became NatWest’s deputy chief executive in December 2018.

During her tenure, she has been a first-hand witness to the empire building under Fred 'the Shred' Goodwin, state nationalisation, and the subsequent multi-year restructuring under Stephen Hester and Mr McEwan. What does it mean to have stayed loyal to an institution that sought to conquer the world, failed spectacularly, and then spent a decade downsizing, apologising and paying billions in fines and settlements?

The armchair psychologist might conclude that Ms Rose will be itching to remould the lender as a stock to buy, rather than hold or simply avoid. What’s more, with the UK government’s stake down to 62 per cent and now earning dividends, the bank is a smaller political football than it has been at any point since the financial crisis.

But today’s RBS calls for a different type of leadership. With many of the toughest structural decisions already made by her predecessors, Ms Rose will be left to navigate macroeconomic issues largely outside of her control.

Lower-for-longer interest rates are a major obstacle to earnings growth. Efforts to fend off the rise of digital banks are so far unproven. And while the bank continues to repair its regulatory relationships and capital buffers, investors remain acutely sensitive to the perceived or real impact Brexit could yet have on the small- and medium enterprises to which RBS is heavily exposed.

IC View: These substantial tests help to explain the board’s choice of an insider, but investors still lack confidence in the roadmap to a double-digit return on tangible equity. A decision on the fate of the underperforming NatWest Markets and Ulster Bank divisions might provide Ms Rose with early wins, while consolidation in the super-tight UK mortgage market presents another opportunity. It is difficult to say how low the bar has been set for what many view as the toughest job in UK banking, but we remain neutral on prospects for Ms Rose’s first year. Hold at 214p. AN

Last IC View: Hold, 187p, 4 Sep 2019

Brendan Horgan – Ashtead

After more than a decade in the top job, Geoff Drabble joined the exodus of FTSE 100 bosses earlier this year, stepping down as chief executive of Ashtead (AHT). Taking over the reins at the beginning of May, his successor, Brendan Horgan, is no stranger to the equipment rental group. Having joined the North American business, Sunbelt Rentals, in 1996, he ascended through the ranks before being appointed chief executive of the division in 2011. In January last year, he also became the group’s chief operating officer.

To say Mr Drabble left big shoes to fill would be something of an understatement. Under his tenure, Ashtead’s shares rose from around 160p to over 2,100p. But Mr Horgan’s contribution to that success story cannot be underestimated. He spent the past eight years running the growth engine of the business – together with the expansion into Canada, the combined North American Sunbelt businesses accounted for 89 per cent of group revenue and 96 per cent of operating profit in 2019. The booming US business has been key to supporting a return on capital employed above 20 per cent in recent years.

While many new chief executives might begin with a shake-up, Mr Horgan has opted not to introduce change for its own sake. Continuing Ashtead’s long-established strategy of pursuing organic growth supplemented by acquisitions, the first quarter of the 2020 financial year saw £462m invested in the rental fleet and £196m spent on six bolt-on acquisitions. Sustaining double-digit rental revenue momentum in the US, 18 per cent growth is already ahead of the full-year target of 11-15 per cent. “Project 2021” remains in place, targeting 900 locations and more than $5bn (£4bn) of revenue by 2021. Aiming to increase the US market share from 9 per cent to 15 per cent over the medium term, analysts at Jefferies believe this could reach 25 per cent in the next decade.

By and large, shareholders seem happy with the results so far, with 96 per cent voting to re-elect Mr Horgan as a director at the September AGM. Together with the progressive dividend policy, they are enjoying the continuation of the group’s share buyback programme – £125m of share repurchases in the first quarter are part of a wider plan to spend at least £500m on buybacks in FY2020.

IC View: Although Ashtead has diversified into other equipment areas, ongoing exposure to the cyclical construction industry remains its Achilles' heel. Already facing the task of reigniting the (albeit smaller) domestic business amid a UK construction slowdown, Mr Horgan could also find himself battling a downturn in the all-important US market. With the ability to halt investment in new equipment and age the relatively young fleet, Ashtead does have some resilience to a recession. For now, the US growth story is holding up as equipment rental continues to gain traction over ownership. While it’s certainly a risky proposition, we’re not sure Ashtead has yet reached its peak in this cycle. At 2,150p, buy. NK

Last IC View: Buy, 2,294p, 11 Sep 2019

Laxman Narasimhan – Reckitt Benckiser

Reckitt Benckiser (RB.) surprised the market in June when it announced that Laxman Narasimhan would take over as chief executive following the departure of Rakesh Kapoor, who spent more than eight years as CEO and 32 years at the company. This surprise certainly did not stem from Mr Narasimhan’s credentials – he spent seven years at PepsiCo in senior roles, most recently as chief operating officer, and 19 years at management consultancy McKinsey & Company. What took the market by surprise was that Reckitt appointed an outsider as its new head, after having traditionally kept this calibre of promotion internal. The last external chief executive appointment came after the 1999 merger of Britain’s Reckitt & Coleman and Benckiser of the Netherlands.  

This appointment suggests that the Reckitt board is looking for a shift in strategy and culture. This is not particularly surprising, considering that Reckitt has encountered some clear setbacks in recent years. In July it reached a $1.4bn (£1.15bn) settlement with the US Department of Justice and the Federal Trade Commission to put an end to the long-running investigation into the sales and marketing of an opioid treatment drug by a former subsidiary. It also faced cyber attacks two years ago, and a failed product launch in the Scholl footcare line three years ago, among other issues. The shares have traded on a largely downward trend, and have lost around 15 per cent of their value over the past 12 months.

For analysts at Jefferies, Mr Narasimhan’s experience and published views while at Pepsi point to a “deep knowledge” of emerging markets, as well as a focus on e-commerce, calling both “highly relevant credentials” to bring to managing Reckitt Benckiser. Reckitt Benckiser chairman Chris Sinclair had similar sentiment when he welcomed Mr Narasimhan to the company, noting his experience across the consumer goods sector in both developed and emerging markets, as well as driving digital innovation.

According to Mr Sinclair, Mr Narasimhan’s initial priorities “will be to focus on delivering outperformance, especially in the health business unit, and to drive RB2.0”, the latter referring to the company’s move to operate under two business units – health and hygiene home. This growth strategy is needed – during the first half of the current financial year sales growth was nearly flat on the prior year. Management cut the full-year like-for-like sales growth target to between 2 per cent and 3 per cent, down from a 3 per cent to 4 per cent range previously due to the “slow start to the year, and the turnaround in health still a work in progress”.

IC View: The outgoing chief executive was credited with transforming the business from a household cleaning business into a “world leader” in consumer health and hygiene, and the architect behind the RB2.0 reorganisation to drive future growth. Given the positive share price reaction to Mr Narasimhan’s appointment, it appears that the market would welcome an outsider’s fresh perspective. At 6,184p, buy. JF

Last IC View: Buy, 6,415p, 30 Jul 2019

Ken Murphy – Tesco

Dave Lewis joined Tesco (TSCO) as chief executive during the darkest period in the supermarket’s recent history, uncovering the accounting scandal that led to a profit warning, a £6.4bn pre-tax loss and the lowest share price since 2003. Mr Lewis instituted a turnaround plan, closing stores and wringing out hundreds of millions of pounds in savings while investing in the customer offer to get the supermarket goliath back on its feet.

Five years later, after declaring the job complete – a view shared by many in the analyst community – Mr Lewis quit. His unexpected departure prompted outpourings of admiration from the retailer’s chairman, analysts and investors, but before long talk turned to his replacement, a relatively unknown Irishman named Ken Murphy.

Despite a stint as the joint chief operating officer of high-street chemist Boots from July 2011 until October 2013, the primary concern around Mr Murphy is that investors know little about him. After Boots, he joined pharmaceutical giant Walgreens Boots Alliance as managing director, then chief commercial officer, president of global brands and executive vice president, according to his LinkedIn page.

Broker Bernstein noted Mr Murphy was “relatively unknown”. Barclays Equity Research echoed the sentiment, although it added that his expertise “would seem a strong fit” and pointed out that Mr Lewis himself was not particularly well known when he joined Tesco in 2014.

Mr Lewis is due to stay in the role until next summer, but due to contractual obligations Mr Murphy has with his current employer a start date has yet to be announced.

Shore Capital analyst Clive Black said much of Mr Murphy’s experience would be relevant to Tesco, such as having worked at a high-street brand in Boots, and at a multinational in Boots Walgreens Alliance. However, he added: “The proof of the pudding will be in the eating.”

Mr Black also painted Mr Murphy as someone who is “exceptionally data-driven and intelligent, but also personable”. He was educated at University College Cork and Harvard Business School.

A 2012 interview with trade magazine Retail Week – while working at Boots – hints at a commitment to corporate social responsibility. Asked what keeps him awake at night, Mr Murphy answered “the ever-growing gap between those who have money and those who don’t in this country”. Ironically, his starting basic salary at Tesco will be £1.35m a year, although it should be noted that this is well below the FTSE 100 average of £3.46m.

IC View: In announcing his resignation, Dave Lewis stressed the strength of the team Mr Murphy will inherit, which will be crucial if the supermarket is to see off competition from discounters and online delivery. It is natural for a new leader to try to put their stamp on a company, but we hope to see him sticking to the group’s shift towards convenience and online retailing. Buy at 241p. TD

Last IC View: Buy, 244p, 2 Oct 2019

Penny James – Direct Line

When Direct Line (DLG) installed Penny James as its chief financial officer in November 2017, the insurer’s shares had recently crossed the 400p threshold, nearing the all-time high of 410p achieved in 2015. Times were good. The group had secured a first-half double-digit rise in motoring gross written premiums, and its capital was sufficiently covered to reintroduce special dividends.

Fast forward two years, and things are looking less rosy. Ms James, who before joining Direct Line had been Prudential’s (PRU) director of group finance and held a handful of chief financial officer gigs elsewhere in insurance, stepped up to become chief executive in May 2019. In the two years since Direct Line shares briefly broke through the £4 barrier, the insurer’s shares have lost nearly a third of their value. Peel Hunt analysts do not expect a special dividend this year, although they haven’t entirely ruled one out, given the insurer’s build-up of excess capital.

Chief among Direct Line’s problems has been motor insurance cost inflation, which is weighing on profits. Repair cost inflation is hovering around 7-8 per cent, according to one peer cited by Peel Hunt. In response to rising costs, Ms James is raising motor rates and diversifying the overall business, securing growth in its rescue and commercial arms in a bid to offset reductions in motor premiums.

Ms James must also reckon with increasing regulatory pressure. Earlier this month, the Financial Conduct Authority (FCA) laid out a range of possible answers to concerns over motor and home insurance pricing, and touted a possible ban on so-called ‘price-walking’, a practice that sees renewing insurance customers charged incrementally higher rates and effectively penalises them for their loyalty. 

JPMorgan analysts earmarked Direct Line as potentially vulnerable to price intervention from the FCA. In response to the regulator’s proposals, Ms James said that her insurer agreed with “many of the possible remedies set out” and accepted that “prices shouldn’t keep rising for no reason”. For several years now, Direct Line has reviewed its customers’ renewal prices when they enter their fifth year with the company, and it says many customers have seen premiums frozen or discounted as a result.

IC View: Penny James’s chief challenges undoubtedly lie in motor insurance, where there is both cost and regulatory pressure that could dampen earnings in the short term. She has been busy building her team – in September, she poached Tim Harris from Royal London to be her new chief financial officer. We await more tangible progress on her diversification push before upgrading. Hold at 285p. AJ

Last IC View: Hold, 355.4p, 5 Mar 2019

Bernard Looney – BP

BP (BP.) chief executive Bob Dudley is in his last months at the helm of the supermajor, with the company confirming upstream boss Bernard Looney as his replacement this month. Mr Dudley took over in 2010 after the Deepwater Horizon disaster, which left the company reeling from the prospect of billions in fines and restitution payments and an image ruined by Tony Hayward’s handling of the crisis. 

Mr Dudley’s legacy is consistent dividend growth and a stable share price, although there are questions over BP’s direction in a world trying to cut carbon emissions. When Mr Looney takes the top job in February, he will have to align BP more closely with the Paris climate goals, as the company has promised, while maintaining growth. 

The Irishman comes from the company’s largest and highest-earning division, which contributed two-thirds of BP’s underlying replacement cost profit last year while also seeing 148 per cent year-on-year growth from 2017. BP chairman Helge Lund, in his job for less than a year, said Mr Looney was up to managing the company in a changing investment climate. “[He has a] clear sense of what BP must do to thrive through the energy transition,” Mr Lund said. This is no easy task, as institutional pressure is ramping up on big emitters. Happily for Mr Looney, he will have a war chest with which to find a new path as Deepwater Horizon payments tail off and the cash comes in from the $5.6bn (£4.4bn) sale of the Alaska unit.

IC View: BP has years of expansion set in stone, such as the 30 per cent-owned and operated $6bn Azeri Central East deep water project approved this year. Mr Looney will have to work out whether he wants to continue on this expansionary path. Not an easy decision to make. Given the current uncertainty, sell. AH

Last IC View: Sell, 488p, 4 October 2019.