Marks & Succession

There is only one boardroom drama worth talking about now. Those hoping for our opinions on the boring Patrick Drahi stake-building in BT/Glencore takeover bid for Teck stories, sorry but you’ll have to wait a while.

It’s the 'Succession' battle for the top job at Waystar Royco that has us hooked.  After Logan Roy’s unfortunate mile-high demise in the bathroom of his private jet, which of his privileged but feckless children will take the top job? His youngest son, slime puppy Roman, seems out of the running after an emotional breakdown at his father’s funeral. Logan’s only daughter, Shiv, has hitched her wagon firmly to the Matsson takeover vehicle, although the Swede doesn’t appear to be a wholly reliable partner. Kendall, long seen as the heir-apparent, appears to be in the driving seat but hasn't historically been the most reliable driver. Or could a left-field candidate like Cousin Greg (the Egg) usurp them all at the death?

Thankfully, we are non-shareholders in Waystar Royco for a couple of reasons. Its corporate governance failings would give our compliance/ESG teams nightmares and, perhaps more importantly, it’s fictional. The baton passing from one Chief Executive to another can, in real life as well as TV-land, have a dramatic impact on a company’s fortunes. But how can investors tell whether the right appointment has been made? A snap judgement can be made on a candidate’s experience and whether they appear a good fit for the role, but these instant reactions aren't a particularly reliable indicator of long-term success. Even assessing a company’s share price over a number of years can offer a misleading impression of the quality of business a CEO has built.

With these considerations in mind, we’ve recently had to try and assess the management succession plans at Marks & Spencer, a holding in the SVM UK Opportunities fund. Former CEO Steve Rowe, who left the business in May 2022, offers a textbook example of why we shouldn’t just judge someone by share price performance alone.

Appointed in April 2016, M&S’ stock price declined by over 60% during Rowe's tenure. This fails to even begin to tell the story. Rowe inherited a business that was losing market share, had a failing online offering in an increasingly omnichannel world, and a bloated cost base. Brexit, a pandemic, and war in mainland Europe also proved minor irritants. Alongside Chairman Archie Norman, famous for turning around Asda in the 1990s, he successfully addressed these issues and left the company on a much stronger footing in terms of both operational performance and customer perception. Recognising the improvements made in the business and believing that the M&S brand still resonates strongly with the UK consumer, we entered a position a few months into the pandemic.

The company has performed well both operationally and from an investment perspective since the pandemic.  When it came to selecting a replacement for Rowe, M&S’ board had several internal (and presumably external) candidates to consider.

Would they select Stuart Machin, well-regarded in his role as co-COO and Food Managing Director? Or would it be Stuart’s fellow co-COO, Katie Bickerstaffe who also held the vital role of Chief Strategy and Transformation director? The veteran CFO, Eoin Tonge, was another whose name was in the frame. In the end, and much to our surprise, they decided to promote all three making Machin and Bickerstaff co-CEO’s and adding the title of Chief Strategy Officer to Tonge’s financial duties.

We were sceptical about the arrangement. A few months later we were proven correct about its stability as Tonge left to take up the CFO role at Primark’s owner, Associated British Foods. Since then, though, the company has not missed a beat. M&S’ full-year results, released this week, comfortably outstripped consensus expectations. Strong cash performance has allowed the company to resume dividend payments and the long-term outlook for both its Clothing & Home and Food divisions may be brighter than it has been for many years. Could the co-CEO model catch on? That’s doubtful, most CEOs are far too egotistical for it to work, but it appears to be doing the job for M&S right now.

Perhaps the best outcome for Waystar Royco would be for the siblings to try one last time to unite and form a management dream team… but that wouldn’t make for very good TV.

Written by Craig Jeruzal and Neil Veitch

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