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Idiosyncratic Factors of Executive Quality and CEO/CFO Leadership Changes

Data Science and Technology

By FactSet Insight  |  November 26, 2019

Evaluating executive quality and incentive alignment is key to any prudent ESG strategy. Executive Teams vary across companies and can be scored for unique skills and performance abilities. Executive Teams are a strong and persistent source of idiosyncratic excess returns. Frequent changes with executives can also result in impacts to company performance.   

Looking back to 2008, data on CEOs and their teams were analyzed to see if executives are the quantifiable differential between average industry returns and sustained excess returns. Management CV is an independent research firm that collects this time series data. The data is reported with no look-ahead or survivor bias. Companies with executive teams that had a rank of 1 outperformed companies with executives that had a rank of 5 over 70% of the time over a 36-month period. 

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Another evaluation can be done on executive changes. CEO and CFO changes by Russell 3000 companies are a major source of excess total returns over six to 24 months from the date of the executive change. CEO and CFO changes demonstrate momentum and persistence. Another factor that can result in excess return is prior industry experience, which plays a key role in the success of a newer executive.

There has been a sharp increase in CEO firings and retirements in the Russell 3000 over the last decade. Also, there has been turnover of about 18-20% for Russell 3000 companies. 2019 for example, has already averaged 72 CFO change announcements per month. This is up from an average of 66 CFO change announcements per month in 2018, 60 per month in 2017, and 24 per month in 2016.

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The new addition of Management CV data on Open:FactSet creates a powerful offering to the investment community to evaluate the impact of executive ranks and changes on company performance. For a deeper dive, please listen to the webcast.

To start your free trial of Management CV please visit: https://open.factset.com/products/executive-team-and-ceo-quality-ranks

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