Should GSK investors be disgruntled about its insider CEO pick? If they want big changes, yes

Emma Walmsley

GlaxoSmithKline is breaking new ground with its choice of a woman as its next CEO. The problem is, that’s not all the ground investors want GSK to break.

Some investors are reportedly upset that GSK chose its consumer chief, Emma Walmsley, to replace CEO Andrew Witty--not because Walmsley is a woman, but because she’s an insider, and as they see it, less likely to make big changes. According to one analyst's calculations, they're right.

And most likely, they’re right--at least statistically speaking. Leerink Partners analyst Geoffrey Porges recently dug deep into CEO comings and goings in Big Pharma and Big Biotech, and found that insider CEOs were far more likely to stick to their companies' previous program, and their shares did, too.

“The difference between the internal and external appointments was striking,” Porges said in an interview, noting that, in his analysis, external CEOs were associated with an 18% relative return over their first year in the job, compared with just 4% for insiders.

The choice of CEO didn’t necessarily cause the difference; companies with underperforming shares are more likely to appoint outsiders, and so there’s more room for upside. But the differences are still worth paying attention to, Porges said.

“When an external CEO is appointed, they bring a fresh set of eyes,” he said. “They look at a company’s performance in a different way, they challenge preconceived notions, and typically puncture some of the myths in the company.”

With insiders, it’s “more or less business as usual,” he said, and a company is most likely to “continue its existing strategy.” Internal picks are also far more common, at 70% of the CEO transitions Porges analyzed.

For companies chugging right along, that’s not necessarily a problem. Theoretically, if GSK’s recent financial performance continues and the shares rise accordingly, then Witty’s low-margin, high-volume business strategy may find its full vindication under Emma Walmsley.

But if investors are dissatisfied, and they want a quick stock pick-me-up, then an insider CEO isn’t likely to deliver. From the get-go, outsider CEOs deliver slightly better share returns, and the spread widens considerably as their first year in office progresses, Porges found.

Bernstein analyzed 31 CEO changes over 15 years at 17 companies, profiling the executives’ education, experience and job history, and the company’s share price. Taking the overall market performance at the time into account, Porges found companies with new outsider CEOs delivered returns of 18% over the first year, compared with 4% for the internal hires.

“There appears to be a pattern among the best performing post-CEO transition stocks--they were underperformers into the transition and chose to appoint an external candidate to the CEO position,” Porges wrote in an investor note. Then, through the first year, “the external CEO stocks delivered substantial upside and were among the best performers in the group (and presumably the market).”

At Glaxo, some shareholders have been restive for awhile--to the point where some of them were pushing to replace Witty. Neil Woodford, the high-profile U.K. investor, publicly pressured the company to break into several pieces, and he particularly singled out the company’s consumer health business as a sale or spinoff candidate.

Witty and his team, however, have been committed to the low-price, high-volume strategy outlined after the Novartis asset swap. That deal beefed up GSK’s vaccines business, sent its cancer drugs to Novartis and established a consumer health joint venture led by Glaxo--by Walmsley, to be exact.

Now, according to The Telegraph, some GSK shareholders are worried that, as CEO, Walmsley won’t be “completely unbiased” when and if it comes time to decide whether to spin off the consumer health unit.

If that’s the case, she wouldn’t be alone among her insider CEO peers. According to Porges, one of the things external candidates are more likely to do is sell off assets.

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