It’s another curse of the bear market: Chief executive officers face constant pressure to deliver bottom-line performance - or face the ire of shareholders.
By Laurie Kaplan Singh
November 2001
Institutional Investor Magazine
Disgruntled institutional investors are notably willing to act on their anger, especially in Australia and the U.K. According to New York-based executive recruiter Russell Reynolds Associates, which recently released its sixth annual survey of institutional investor attitudes, 15 percent of polled investors called for a CEO’s termination in the past year. In Australia and the U.K., 37 percent and 27 percent of the respondents, respectively, said they had “contributed” to a CEO’s departure.
The 2001 survey, “CEO Turnover in a Global Economy,” was administered for Russell Reynolds by Wirthlin Worldwide, an international opinion research firm, which conducted interviews with 300 institutional investors in Australia, Canada, France, Japan, the U.K. and the U.S. The interview questions were designed to provide chief executives and board members with insights into the attitudes of their largest and most influential shareholders toward senior management and corporate governance. For the first time, the Russell Reynolds survey addressed the issue of CEO performance.
In sharp contrast to the previous five years, the 2001 survey was conducted amid growing signs of an economic slowdown and a stock market correction in the U.S.
“Shareholders have become increasingly demanding of senior management,” says Andrea Redmond, a managing director in Russell Reynolds’s board services practice who specializes in recruiting CEOs and board directors. “Whereas investors once evaluated a CEO’s performance on an annual basis, they now judge it quarterly,” she notes.
Not surprisingly, the top priority for most investors is the bottom line. Ninety-four percent of those polled said a company’s financial performance is the most important factor influencing their investment decisions, and 75 percent said they judge a CEO’s performance by the company’s financial results. Investors are increasingly concerned about a CEO’s ability to communicate strategy and vision. Eighty-five percent of respondents cited poor strategy and vision, along with lackluster financial performance, as evidence that a CEO is in trouble.
Reach for the stars
They’re hoping to give Morningstar a run for their stars.
With the October 8 introduction of the Lipper Leaders fund evaluation system, Lipper, a subsidiary of Reuters Group, aims to bolster its name recognition among financial planners and individual investors, for whom longtime rival Morningstar has become a dominant brand.
Founded in 1973, Lipper is probably the oldest provider of mutual fund data in the U.S. For most of its existence, the firm marketed to institutions. Meanwhile, its younger rival, Morningstar, founded in 1984, made its risk-adjusted five-star rating system the preferred source of fund information for the retail market - a market that Lipper now hopes to crack.
“The new system will allow us to branch out and focus on financial planners, 401(k) advisers and individual investors,” says Thomas Roseen, a research analyst in Lipper’s Denver office.
Lipper’s new group of risk and return measurement tools currently offers two key statistics. Capital preservation measures a fund’s historical tendency to avoid capital losses; consistent return judges the variations in a fund’s returns.
Lipper computes its capital preservation measure by calculating for each of the 9,500 funds in its universe the monthly negative returns over a 36-month period. For each fund category, it ranks the totals in ascending order and divides them into quintiles, with the first quintile consisting of the funds with the lowest total negative returns over the period. The funds in this quintile are designated Lipper Leaders. “Our capital preservation measure is designed to capture downside risk, or the risk of losing money,” says Roseen.
Morningstar computes its risk statistic by adding up for each fund over a minimum 36-month period all monthly returns below the Treasury bill rate, while Lipper tallies negative returns. Essentially, Lipper defines risk as the possibility of losing money; Morningstar defines it as the possibility of underperforming a risk-free rate of return.
Lipper’s notion of consistent return combines the Hurst-Holder, or H, exponent and effective return. The H exponent is a measure of the volatility of a fund’s daily returns. Effective return, which was developed by the Swiss forex trading firm Olsen & Associates, provides a risk-adjusted measure of a fund’s performance. Lipper marries the two statistics by feeding both scores into an optimizer, which ranks the funds based on the degree to which they exhibited the best combination of the two.
Over time, Lipper plans to add new measures to its group of fund evaluation tools. Among them: measures of a fund’s aftertax performance, as well as a tool that will allow users to specify their own particular time horizon for evaluating funds. “One of our key objectives is to get away from the one-size-fits-all approach,” says Lipper Research analyst Jeff Tjornehoj.
