Sudden CEO exits can bring protracted investor pain

Mumbai: Unforeseen departures of top corporate executives have triggered sharp sell-offs in shares of these companies.

On Friday, Navin Fluorine, a chemical company plummeted by as much as 15%, marking its most significant single-day decline in eight years, following the sudden resignation of its CEO. Shares of over a dozen companies, in which top executives resigned abruptly in the last one year, have seen similar falls. Only half of these stocks have managed to recover, according to an ET analysis.

The share price of Shoppers Stop witnessed a sharp decline of nearly 13% on August 25, following the resignation of the company's managing director, Venu Nair. The stock declined another 3.5% till Friday.

Similarly, shares of Orient Electric and Meghmani Organics declined over 6% in July and August when their respective CEOs resigned. While Meghmani Organics recovered 2% from the fall, Orient Electric has been down 8% since then.

Stability of management is a crucial aspect of stock investing especially in smaller companies. So, when a chief executive officer, under whom the company has grown of late, leaves the firm, investors see it as an adverse signal.

"Shareholders react negatively to the CEO's unexpected exit from the company as the top executives have a remarkable track record in terms of leadership skills and transforming the business," said Gaurav Dua, senior vice-president at Sharekhan. "However, some businesses have an inherent strength, and consequently, the situation tends to normalise over a period of time."

In earlier instances, Crompton Greaves Consumer's shares plummeted by 12% in April but recovered 20% since then. Shares of South Indian Bank declined as much as 17% on March 29, the second biggest single-day fall in two decades, after Murali Ramakrishnan turned down the proposal for re-appointment as managing director and CEO of the company. However, the stock has rebounded since then.

"Shareholders should avoid smaller companies where succession of CEOs is not planned adequately or a plan B is not in place," said Feroze Azeez, deputy CEO of Anand Rathi Wealth. "Business culture and strategy must be transmitted to the following possible custodian. If personal wealth needs estate planning, then public wealth surely does, especially in small and mid-size companies."