Twitter made this shareholder-friendly move after Jack Dorsey resigned as CEO. Here’s why.

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Twitter TWTR,
Investors may be making a mistake by reacting so negatively to the resignation of Jack Dorsey as CEO and his replacement by a relatively unknown company insider – Parag Agarwal.

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The chart below shows the performance of Twitter stock relative to the S&P 500 SPX,
Since the announcement of Dorsey’s resignation on the morning of November 29. The stock has lagged behind the S&P 500 since then. Barron called a money manager a “disappointment from Wall Street that an internal successor had been chosen” for this backward performance rather than a high-profile outsider.

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My Tip to Wall Street: Read academic research about the importance of CEOs to the long-term success of an organization. My reading of these studies suggests that Wall Street should really celebrate that Twitter’s board elected an insider. Outside CEOs often do a worse job than lesser-known managers who have worked their way through the ranks of corporations, who eventually lead like Agarwal.

This is because the internal culture of a corporation plays a much larger role in the success or failure of the company than the CEO. Internal candidates like Agarwal are steeped in Twitter’s corporate culture and know how to navigate it. In contrast, outside CEOs have no such familiarity, which is why they are often less effective leaders.

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To be sure, the board of directors may want to bring in an outsider to change the internal culture of a firm. Unfortunately, in a competition between an external CEO and an internal culture, the latter usually wins. gautam mukundA professor of organizational behavior at Harvard Business School has found from his research that “most CEOs who try to radically change a company will fail.”

,‘Wall Street exaggerates the importance of the CEO.’,

The implication is that Wall Street exaggerates the importance of the CEO. Rakesh Khurana, an associate of Mukund’s professor of leadership development at Harvard Business School, told me on the sidelines of a previous CEO shakeup that “large-scale statistical studies have failed to find any direct causal link between CEO and firm performance.” ” The internal culture of a corporation “has a far greater long-term impact on the success of the company” than that of a CEO.

importance of culture

What is this corporate culture that plays such a major role? It can’t be easily defined, which is one reason why Wall Street doesn’t give it as much attention as it deserves. A partial list of what is included in corporate culture a . was provided by Recent study by three finance professors: Gary Gorton and Alexander Zentefis (both at Yale) and Jill Grenon (at Duke),

You can easily see why culture is not easily defined. But just because it’s hard to define doesn’t mean it has little or no effect.

An example of how large the influence culture is when two companies merge through outright mergers or acquisitions. Several studies over the years have documented that the average merger destroys value when taking into account the market valuation of both companies and comparing them to otherwise similar companies that do not merge. potential culprit, according to Eric van den stein, a professor of business administration at Harvard Business School, “Culture Conflict – The Destructive Effects of Two Organizations Combining Different Cultures”.

no guarantee

To put it bluntly, choosing an internal candidate to be CEO is not a guarantee of success. So there is no assurance that Twitter will do well under its new CEO.

Think about the disappointing performance of General Electric GE,
Stocks when Jeff Immelt was CEO. Immelt had been working for GE for 19 years when he was appointed CEO. During his tenure, GE stock lagged behind the S&P 500 by more than six percentage points annually.

Still, my reading of the research shows that GE is more the exception than the rule. Twitter has a better chance of success by nominating an insider as CEO, as it would have catered to short-sighted investors on Wall Street and hired a high-profile outsider.

Mark Hulbert is a regular contributor to Businesshala. Their Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. he can be reached here [email protected]

more: Why GE’s tax-exempt split could power the stock higher and reward patient investors

Too Nasdaq and Dow are now trading in a way that was evident just before the Internet bubble burst


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