Morningstar has announced the three finalists for its 2013 CEO of the Year award: Darren Gee of Peyto Exploration & Development Corp., Hunter Harrison of Canadian Pacific Railway Ltd. and John Martin of Gilead Sciences Inc.
Congratulations! But have these stocks just become the year's most urgent selling opportunities?
Awards that celebrate the past successes of chief executives can be the kiss of death in terms of future performance. Morningstar picked Nokia Corp.'s Jorma Ollila as its CEO of the year in 2000, coinciding with a peak in the handset maker's share price; since then, it has fallen more than 80 per cent.
That same year, Chief Executive Magazine named Cisco System Inc.'s John Chambers as its top pick, in a year when Cisco's share price traded as high as $80 (U.S.); 13 years later, it is slightly above $23.
Take a look at the previous winners of "Canada's Outstanding CEO of the Year" and you'll find Jim Balsillie and Mike Lazaridis of Research In Motion Ltd. (now BlackBerry Ltd.) in 2006, Dominic D'Alessandro of Manulife Financial Corp. in 2002 and John Roth of Nortel Networks Corp. in 2000.
This isn't exactly a winning long-term portfolio. Nortel shares are worthless, BlackBerry has fallen more than 80 per cent and Manulife's share price is back to where it was a decade ago.
We're no better. Report on Business picked hedge fund manager Bill Ackman in 2012, only to see him lose big on J.C. Penney Co. Inc. and Herbalife Ltd. this year. In 2011, we picked Christine Day of Lululemon Athletica Inc., but the stock has recently stalled amid some operational glitches, and Ms. Day has announced her intention to step down as chief executive.
These might look like cherry-picked worst-case examples of what happens to stocks after their chief executives are anointed with superstar status – or feed into suspicions that such awards are simply unlucky.
But there is also strong evidence backing up these suspicions. In their 2009 paper, "Superstar CEOs," Geoffrey Tate, now at the University of North Carolina, and Ulrike Malmendier at the University of California, Berkeley, undertook a detailed examination of what happens to award-winners.
They looked at CEO awards from Business Week, Financial World, Chief Executive, Forbes, Industry Week, Morningstar.com, Time, Time/CNN, Electronic Business Magazine and Ernst & Young, from 1975 to 2002. They then examined the impact on corporate performance and the share price over the next three years.
Their conclusion: "We find that firms with award-winning CEOs subsequently underperform, both in terms of stock and operating performance. At the same time, CEO compensation increases, CEOs spend more time on activities outside the company like writing books and sitting on outside boards, and they are more likely to engage in earnings management."
They make it sound as though an award goes to the winner's head, contributing to feelings of invincibility that lead to excessive risk-taking and subsequent blowups.
But there could be more going on here: Perhaps those giving the awards are too often attracted to shiny things – like big personalities, grand promises and turbocharged share prices. All too often, the shine disappears when reality sets in.
Like other award-givers, Morningstar selects chief executives whose abilities go beyond the bottom line in any given year.
As they put it: "Morningstar annually recognizes a chief executive who exhibits exemplary corporate stewardship, demonstrates independent thinking, creates lasting value for shareholders, and has put his or her stamp on an industry."
But a hot share price helps, too. Among this year's nominees, all three are outperformers in 2013: Peyto's share price has risen 33 per cent, Canadian Pacific has jumped 51 per cent and Gilead Sciences has soared 79 per cent.
When you look at the last seven of Morningstar's hall-of-famers, going back to 2006, just four of the stocks have outperformed the S&P 500 in the following year, while three have underperformed the benchmark index.
In other words, investing in the latest CEO of the year gives you only slightly better odds of success than flipping a coin – and avoiding winners spares you from riding a hot stock that is about to turn stone cold.
David Berman