Too much of ESG?

Last month, former head of the board of governors at the Japanese Government Pension Fund, the largest retirement fund in the world, speculated that ESG investing may be showing signs of a bubble1. Indeed, opportunities in ESG space have been extensively favoured by investors: inflows into sustainable ETFs tripled in 2020 from a year earlier2. However, unlike many short-term fads, we believe that ESG is a trend, which is here to stay. With that in mind, investors may find themselves scrutinizing their portfolios, wondering, whether they should join the ESG party as well. In all the fairness, variety of ESG products and approaches can leave one baffled by which one to favour, while robust evidence for long-term outperformance of sustainable investing is yet to come. In case of the Japanese Pension Fund, for example, portfolio managers were left unimpressed with ESG returns, failing to beat the benchmark by investing in a basket of indices focused on women empowerment, carbon efficiency and other ESG-inspired themes3.

Quality investing favours strong ESG profile

Unsurprisingly, achieving sustainable outperformance requires a little more work than simply tracking an ESG-focused index. While ESG is certainly a material factor in long-term shareholder value creation, other aspects of a company’s business must also be considered to solidify the investment case and, besides, these aspects can become precondition for good ESG behavior. Therefore, we have always adhered to an integrated approach, wherein ESG analysis is yet another essential attribute of quality investment style. Fortunately, one does not have to sacrifice financial strength for the strength of ESG or vice versa, as we often observe that quality companies put emphasis on sustainability as part of their business strategies and exhibit excellent ESG performance, enabling construction of a responsible portfolio. Our comprehensive ESG assessment also includes the analysis of corporate KPIs, such as GHG emissions, employee injury rate, board independence and many others, which are compared to the sector medians. As depicted in Figure 1, quality investment universe is better at disclosing ESG data and obviously has a higher tilt towards ESG leaders – companies with better ESG metrics in general, compared to their peers.

Fig.1: Corporate ESG standing in Developed Markets, Quality vs. MSCI World (July, 2021)

Source: Alphinox, Reuters

Focus on ESG as a route to improved financial performance

Quality’s tilt towards ESG leaders comes in handy not only because it is well-suited for sustainability-minded investors, but also because strength of ESG is arguably a factor contributing to excellent financial performance of quality companies. As depicted in Figure 2, companies outperforming their peers on quantitative ESG assessment deliver higher margins and better returns on capital, while their top and bottom lines stayed more resilient during 2020, when the crisis was rampant. Obviously, competent management of ESG-related issues can benefit not only the society, but the company itself through multiple efficiencies, such as an increased employee productivity, cost savings, better decision-making and risk management, enabled by the best corporate governance standards. For instance, TJX Companies, a leading US discounter, has managed to reduce carbon footprint across its stores in Canada by 6% by investing in energy-efficient technology, at the same time saving $1.6 million in annual energy costs. Furthermore, many companies are seizing new growth opportunities by introducing sustainability-driven products, which often command a pricing premium. For example, Orkla, a Norwegian food conglomerate, focuses on plant-based food lines, which have lower GHG footprint. In 2020, Company saw sales across sustainable brands increase by 21% y/y, while the entire Foods segment only grew 3.7%. Such initiatives, undertaken by quality companies, help them maintain their competitive edge and improve business performance.

Fig.2: Median Gross Margin, EBIT Margin, Return on Capital (July 20201), Revenue and EBIT Growth in 2020 vs. 2019 of ESG Leaders vs. ESG Followers, MSCI World Index

Source: Alphinox, Reuters

ESG is just as much about the journey as it is about the destination

When analysing ESG aspect of a company, another, not less important element we focus on, is dynamics of ESG KPIs, and here, again, quality companies shine. As Figure 3 illustrates, quality companies are making more tangible progress towards driving positive change regarding the impact on their stakeholders. For example, median water use to revenue within quality universe was already ~42% below the benchmark’s universe, but median y/y decrease in emissions among these companies was still 1.5 pct points higher than reductions among corporates in the broader market.

Fig.3: Median Values and Median y/y Change of Environmental KPIs in Developed Markets, Quality Universe vs. MSCI World (July 2021)

Source: Alphinox, Reuters

ESG analysis is a meaningful supplement to quality investing

While market participants pile up money into “green” funds, we have always argued that sustainable investing is an integral part of quality approach and embraced ESG analysis as part of our stock-picking since as early as 2010. Based on the facts above, it is evident that quality goes hand in hand with sustainability, and integration of ESG analysis into quality investing makes it a perfect fit for investors who seek not only well-managed companies with robust financials, but also ones that care about the society and the environment, making real impact. Some notable examples include Adobe, which has invested $186.7 million in community support over the last 3 years, Mowi, a leading seafood company, whose green financing projects enabled it to save 121 million m3 of water per year, or Accenture, whose energy management services helped clients avoid more than 800 thousand tons of CO2 in 2020.


1.        Bloomberg (2021), “Beware of ‘ESG Bubble,’ Says Ex-Chair of World’s Biggest Pension”
2.        ESG Investing (2021), “ESG ETF inflows reach $89bn in 2020”
3.        Bloomberg (2021), “The World’s Largest Pension Fund Has Cooled on ESG. Should You?”

Static vs. momentum-based ESG rating

Glaciers meltdown, frequent forest fires, Venice under water – more and more cases point to the alarming problem of global warming. Further attention to the climate change has been attracted also by Greta Thunberg giving emotional speech during UN summit. Growing awareness about the environmental issues is likely to help the funds with ESG tilt in attracting more funds. Caring and conscious investors are willing to contribute to the improving climate conditions with their impact investing – term applied when the effect from investments outweighs the investment returns.

Usually ESG ETFs and funds aim to invest in the companies with the highest ESG ratings or in the companies with already established socially responsible and environment-friendly operations, lowest CO2 emissions, lowest amounts of waste generation, with lowest amounts of water use. Interestingly, the biggest contributions to the environment preservation and increased social responsibility can be made by yet imperfect enterprises, which, however, made a commitment to improve and are consequently heading for their goal. With originally lower ESG standards, these companies tend to have higher leverage, as the effect of adopting higher ESG standards will likely have more positive effect on their cost discipline, risk control, etc. Research indicates that companies with positive ESG momentum tend to perform better than their peers with already developed ESG culture.

Our perception of ESG momentum

To exclude any subjectivity in our judgement on ESG improvement, we have selected only numerical KPIs, which companies publish in their sustainability reports. Therefore, analytical sample includes only those companies, which care about ESG as it was evidenced in published ESG reports, so that the minimum level of compliance with standards of being socially and environmentally responsible is ensured. In total 12 criteria were selected: four in each area – Environment, Social and Governance. ESG momentum rating covers most important quantitative ratios, including board independence, salary gap, lost time incident rate as well as resource consumption and CO2 emissions to name a few. All absolute values, such as energy consumption or CO2 emissions, were taken in the context of total sales.

We have also concentrated our analysis on European companies as US firms are not yet sufficiently advanced in providing extensive data on ESG performance indicators, leaving scarce possibility for thorough analysis.


Fig. 1: ESG score and ESG momentum by industry

Source: Hérens Quality Asset Management, MSCI

Average momentum ratings for the sectors did not come as a surprise: Utilities are the best in improving their ESG standing, followed by Materials and noteworthy they both have low absolute ratings. Healthcare companies, which are already playing in higher ESG league, have lowest ESG momentum.

Fundamental Quality = Good ESG. Is there space for further ESG improvement?

It was stated many times that fundamental quality goes hand in hand with good ESG management, which facilitates risk reduction, operational transparency, capital attraction, cost control.

Knowing that quality companies usually have high ESG scores, one would expect them to demonstrate lower ESG momentum – utmost efficient companies cannot make a leap in improvement in every dimension every year. So, the average ESG momentum rating for quality companies in 2019 is 12.4, while the market’s average is 13.3. Still, Financials and Industrials within the attractively valued quality universe managed to do better than the market in ESG improvement.

Fig. 2: EU Quality companies vs. MSCI Europe: ESG Score and ESG momentum

Source: Hérens Quality Asset Management, MSCI; no quality identified in the following industries:
communication services, energy, real estate, utilities

There are also few ESG role models among quality firms. For instance, world’s leading software company, SAP, not only has excellent financials, but also excellent rating on ESG score and ESG momentum (improved on 9 out of 12 metrics in 2018). German IT giant has improved particularly well in the environmental area dedicating itself to the sustainable development: uses 100% green energy for data-centers and buildings, phases out single-use plastics, plans to become carbon neutral till 2025.

ESG momentum and performance

Now, the question is whether ESG momentum is worth the same pile of analyst attention as does the static ESG score. The research on ESG momentum says that, in fact, it could generate even more value (Factset, 2019; Societe Generale, 2019). We have checked this statement by considering the value added of ESG score and ESG momentum to the equity performance in the comparative analysis, which covers the assessment of the last four years – longer range is unavailable due to the insufficiency of older ESG data.

Fig. 3: Relative performance of good vs. bad companies according to ESG score and ESG
momentum (MSCI Europe)

Source: Hérens Quality Asset Management, MSCI

During this short period considered, stock selection based on pure ESG rating did not help in generating excess returns, while companies with improving ESG ratings managed to beat the ones with deteriorating ESG KPIs.


ESG hype gains popularity, so more research will follow on static and dynamic ESG scores. But already now there is a lot of evidence in favor of the positive influence they have on corporate performance, reputation and valuation. And obviously the current situation speaks in favor of picking the companies that make greater leap in becoming more environment-friendly, socially responsible and well-governed.


1. Factset (2019). Incorporating ESG Momentum Into an Investment Strategy.

2. Societe Generale (2019). Is “best-effort” the next frontier of ESG analysis?

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ESG Investing – groundless marketing?

Being really caring about the environment and human rights and, therefore, deciding on ESG investing, how confident you can be that your investments do not harm our planet? CFA Institute research revealed that the major investors’ concern around ESG topic is that its integration in the investment process might be just for marketing1. To address this issue certain regulatory actions are taking place. In March 2019 European Commission unveiled its action plan on sustainable finance in an attempt to make investment managers and their clients aware of how their actions might influence the environment and the society2. In few years you will be able to realize what risks your investment portfolio could exert on bio-diversity of Amazon forests or North Sea. This initiative provided additional support to the already hot topic in the financial markets.

10 tn USD – a tremendous pile or 21 % of US managed assets was invested in funds with ESG focus in 20183, which is a fivefold increase since 2010, when the hype around the topic was just in its infancy in the region. In Europe these figures are even higher, knowing consciousness of Europeans about the climate change and responsible social governance. It is obvious that ESG is one of the underlying reasons for capital migration: mutual fund with ESG focus have a certain tailwind in asset growth.

However, might it be that the asset managers market their products skipping proper research on ESG? We decided to question whether ESG-focused funds follow their stated investment objectives and select environment-friendly and socially good companies with transparent and plausible corporate governance structure. For that we have selected the largest funds, which use ESG layer as investment criterion, and compared their portfolio holdings with the benchmark (selected MSCI USA as benchmark due to the funds’ bias towards US companies) and quality companies on governance, social and environmental dimensions, focusing on quantitative analysis and taking median ratios as a base.

Environmental Dimension

First, we have compared the largest by AUM funds with ESG overlay, quality companies and MSCI USA on four basic criteria, which show their environmental footprint (Fig.1). CO2 and waste emissions comparison shows that the majority of considered funds look superior to the benchmark. Noteworthy, quality companies exhibit even better story than the benchmark and the ESG focused funds.

Fig. 1: Environmental criteria, ESG Funds vs. MSCI USA vs. US quality stocks, 2018

Source: Hérens Quality Asset Management, Reuters ; MSCI USA as dotted line

Median use of water and energy of ESG funds’ holdings with few exceptions is lower as compared to the benchmark. And again, quality companies with regard to resource usage are more efficient than the average ESG funds’ holding. It is being stated that by 2022 the environmental factors are to become more relevant for stock and bond investing than the governance factors2, and obviously this has already translated into the increased attention of the ESG fund managers.

Social Dimension

The availability of the company’s social performance numerical ratios is rather limited, as often it assumes qualitative assessment. Quantitative evaluation can also be made but is rather limited, and is primarily based on the ratios related to employees. Two selected ratios, lost-injury-time rate (LTIR) and employee turnover show that, perhaps, this ESG dimension deserves less attention from the ESG funds managers.

Fig. 2: Social criteria, ESG Funds vs. MSCI USA vs. US quality stocks, 2018

Source: Hérens Quality Asset Management, Reuters ; MSCI USA as dotted line

Market average LTIR is lower than the average rate for the companies selected by ESG fund managers (Fig. 2). The same is also relevant for the employee turnover: 11% for the market vs. 11.9% for ESG funds’ holdings. Quality companies also cannot boast about low turnover rates, but their LTIR is significantly lower than that of the market, which is partially explained by lower exposure to the industrials, where LTIR is significantly higher.

Governance Dimension

Board independence, probably, is the first criterion to be checked when evaluating quality of the governance. However, we saw no significant difference in level of independence among the three groups we compared: all were in the range of 80-90%, which is a decent level. The same applied to the board meeting attendance–robust 75% for the market and for the considered ESG funds.

Fig. 3: Governance criteria, ESG Funds vs. MSCI USA vs. US quality stocks, 2018

Source: Hérens Quality Asset Management, Reuters ; MSCI USA as dotted line

Certain difference is seen when it comes to women representation in BoD: ESG funds tend to select companies with proportionally more women in Boards as compared to MSCI USA. But they lag benchmark companies on salary gap ratio having it at 123 vs. 116. Quality companies also here look very good on both governance ratios having lower salary gap and higher women representation.

Concluding remarks

Having conducted quantitative study on ESG fund’s holdings, we have obtained mixed results: ESG funds pay attention to the firms’ environmental performance, but social ratios are being largely ignored. Additionally, we found that quality investing can be regarded as ESG investing without proactively considering ESG factors, as the study shows that US quality companies also proved their quality according to ESG factors, which corresponds to our statement made before.

ESG Funds considered in research: Ariel Fund, TIAA-CREF Social Choice Equity Fund, Vanguard FTSE Social Index Fund, Putnam Sustainable Leaders Fund, Neuberger Berman Equity Income Fund, Calvert Equity Fund, Parnassus Core Equity Fund.


1. CFA Institute research (2019). ESG Integration in Europe, the Middle East, and Africa: Markets, Practices, and Data.

2. European Commission (2019). Sustainable finance: Commission’s Action Plan for a greener and cleaner economy.

3. U.S. SIF Foundation (2018). Report on U.S. Sustainable, Responsible and Impact Investing.

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Top ESG ratings for Quality strategies

More and more investors expect their investments to be managed sustainably. Sustainable investment used to be something of a niche market that often involved value-based thinking, but many investors – especially institutionals – are starting to realize that sustainability can also be beneficial from a return perspective. They pay attention to environmental, social, and governance (ESG) factors because they acknowledge that unsustainable business practices give rise to operational risks that can have a negative impact on a company’s bottom line. This is especially true for investors with a long-term horizon such as pension funds, churches, insurers, etc.

This realization is nothing new for Quality investors. They know from experience that a company needs to be economically sustainable if it is to employ sustainable business practices. Indeed, Hérens Quality Asset Management has always believed that a company failing to operate sustainably in its own right cannot contribute to the sustainability of the system as a whole. For some time now, it has been possible to track this using sustainability and ESG rankings.

Fig. 1 shows the Morningstar Sustainability Ratings for CEAMS Quality equity funds. These are a measure of how well the companies in a portfolio manage their risks in relation to ESG factors, and they therefore make it possible to compare funds from an ESG perspective. The results show that CEAMS Quality equity strategies achieve top ratings and rank among the top 10% in their category for Europe, the USA, and emerging markets.

Quelle: Morningstar

Fig. 1 Morningstar Sustainability Ratings for CEAMS Quality equity funds as of June 30, 2018

Quality as an investment strategy with integrated ESG approach

The high ESG ratings of Quality strategies show that the Quality investment style is a sustainable investment approach in itself. It belongs to the group of strategies featuring an integrated ESG approach in which ESG factors are systematically and explicitly included in the analysis.

Fig. 2: Volumes in ESG/SRI investments by approach and region

Source: GSIA, Report 2016

Fig. 2 shows that by far the most common sustainability approach globally is negative screening, followed by investment strategies with an integrated ESG approach, value-based SRI overlays, and engagement. The Quality approach employed by Hérens Quality Asset Management is all about sustainable profitability. ESG factors are included in the analysis along with key metrics for financial strength, market position, and other aspects. Governance – the G in ESG – is an especially critical aspect in the Quality approach. Experience also shows that good environmental and social practices correlate strongly with good governance.

Governance: the most important factor in ESG analysis and a source of alpha

A company’s governance is often the most important starting point for ESG analysis and also constitutes the interface to economic Quality analysis. Analyzing governance structures offers an insight into the overall quality of a company’s management. Good governance adds value for investors in two respects: it helps them to avoid companies that will fail through weak governance, and companies with good governance often have above-average financial results and ESG ratings (see also Monthly Investment Insights of May 2018 and October 2017).

Quality portfolios are sustainable portfolios

Quality companies are generally also able to meet ESG goals. They care about maintaining their reputation and cannot afford to have it damaged by ecological, social or ethical misconduct. They publish detailed and meaningful annual reports containing statements on their ecological, social, and ethical achievements. Hérens Quality AM checks these reports, asks questions where necessary, and allows these sustainability considerations to flow into its buying and selling decisions.

Where clients have individual requirements concerning the exclusion of sectors or companies that are (in their view) ethically problematic and/or wish to invest in line with specific themes, Hérens Quality can support them with in-house research. The Quality approach with integrated ESG can thus be augmented with additional components at any time.

Fig. 3: Hérens Quality approach with regard to sustainability

Source: Hérens Quality AM

Third-party blacklists can also be taken into account. Experience of using blacklists from renowned ESG research providers including ISS-oekom, Sustainalytics, Inrate, and MSCI for our clients shows that it has no noticeable effect on the performance and risk characteristics of a Quality mandate (with the exception of Quality Switzerland). As a rule, less than 5% of the fund volume is affected by third-party blacklists. This result is not surprising as investment strategies with an integrated ESG approach yield similar results to negative screening approaches.

Background of ESG ratings

In the past, it was difficult for investors to compare different funds on the basis of sustainability criteria. Those who wanted to invest sustainably were restricted to a relatively small group of products that bore some kind of sustainability label. These products, also known as socially responsible investment or SRI funds, often pursue strategies that are based either on exclusion criteria or on an activist approach in which the fund management exerts pressure on companies to adopt more sustainable business practices. There are a number of problems with this. First of all, there are not many products of this kind. Only 2% of the funds in Morningstar’s fund universe, for example, make any claim to sustainability. A further difficulty lies in the fact that funds are labeled as SRI products by the providers themselves, so it is hard for investors to verify the extent to which sustainability criteria are in fact applied (see J. Hale, “Introducing the Morningstar Sustainability Rating for funds”).

Rating agencies and research firms including Morningstar, Sustainalytics, Reuters, MSCI, Inrate, and ISS-oekom have closed this gap in recent years by developing ESG rankings for companies and funds that are intended to make direct comparisons possible. This increased transparency translates into a larger universe of investable strategies for ESG and SRI investors.


Quality is definitely an attractive option for investors who are looking for sustainable strategies. The excellent sustainability ratings awarded to our Quality strategies prove that there is a close correlation between sustainability in the ESG sense and sustainability in the economic sense.

The average ESG rating of the equity fund CEAMS Quality Switzerland can be explained primarily in terms of the portfolio’s construction: whereas most Swiss equity funds use stock weightings that are heavily influenced by the Swiss Performance Index (SPI), the three largest constituents of which – Nestlé, Novartis, and Roche – alone account for approximately 60% of the index, the stocks in the Quality Switzerland portfolio are equally weighted (as far as liquidity allows). This makes for a smaller allocation to large caps and a larger allocation to small and mid caps. As a rule, smaller companies achieve lower ESG ratings because their ESG documentation is less comprehensive.

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From September 2012 to 2014, Tesco’s stock price fell 43% relative to the FTSE100 and Philip Clarke, the company’s CEO, was asked to leave. The UK’s largest food chain had long been a darling of investors and widely regarded as a safe bet, but some recent developments changed that perception. Contributing to the stumble were some short-term revelations, namely a decline in the company’s like-for-like sales in its core UK market despite a £1 billion turnaround program. But the market was also reacting to disturbing legacy items suggesting that all had not been well for some time. There was a £1 billion pre-disposal write-off on Fresh and Easy, Tesco’s greenfield entry into the demanding US market. It was founded in 2007 but never reached profitability. The company also took an £800m write-down on UK properties which would no longer be needed for large out-of-town stores for which there was no demand.

However, Tesco is not alone. AIG, Citigroup, Intel, Nokia, Orange, Rolls Royce, Target and Volkswagen are all also examples of prominent companies that have at some time in recent years lost their shine and substantially underperformed the market. Over the past decade, about one in five CEOs of top 100 companies in the USA and Europe has either been fired or left under a cloud after the company underperformed the market by 25% or more in their last two years1. This article, based on research results, summarizes observable markers for companies at high risk of stumbling that can be incorporated into the stock selection process.

CEO/Management team lack of qualification

In seven stumbles, about a sixth of the analyzed cases, CEOs could not successfully lead innovations or reposition to prevent their company’s market falling away or to keep pace with competition. Though comparatively few in number, these included some of the most dramatic underperformers. Looking at these companies from the beginning of their stumbles to end 2016, the end of our study period, shows the dramatic underperformance of many of these companies against comparable companies that more successfully innovated or repositioned.

Fig 1. Annualized TSR (%) from 2years before CEO left office

Source: Hérens Quality Asset Management, Ashridge Strategic Management Centre

There were early warning signs. Market shares don’t shift dramatically overnight. But companies whose CEOs stumbled were still not able to respond fast enough. For example, Yahoo saw the threat from Google in 2001, but their response to Google’s innovative search and search advertising technologies was ready only five years later in 2006. By then, the battle for market share had been lost. Most stumblers that failed to innovate or successfully reposition under pressure lacked CEOs and top teams with an education and career background to give them the best chance of addressing the key challenges they had to face2. The right career background is not just a matter of having industry experience. For example, Olli-Pekka Kallasvuo had been with Nokia for over 30 years when he became CEO, but he had been educated as a lawyer and his career with Nokia had been mostly in the Finance function. His finance background did not equip him to direct or supervise the extraordinary new product development and technology transformation that Nokia needed in order to compete with Apple’s iPhone.

Bias to growth

In twenty three stumbles, a much larger number and about half our sample, CEOs self-imposed a revenue growth challenge. The company’s core business did not offer strong growth prospects, but it was stable and not directly under threat. Rather than simply focus on being good stewards of solid businesses and creating value for shareholders by returning cash, these CEOs chose to take high risks to increase the pace of company growth. They proactively developed ambitious plans that ended up destroying value. Some CEOs went for one, or in some cases several major acquisitions – such as Bank of America’s acquisition of Merrill Lynch or RTZ’s acquisition of Alcan – that were large relative to the size of their company at the time and did not pay off. Some went for risky diversification: they invested in “question mark” businesses – such as BT Global Services or Tesco Fresh and Easy – which would first need heavy investment to transform and grow before strong profitability could be expected; or they diversified outside their “heartland” into businesses and/or geographies – such as iron ore in Brazil for Anglo or Canada for Target – where their corporate management had little experience.

Lack of Strong Boards

Companies considering embarking on high risk strategies need a strong Board of directors to provide a constructive but tough challenge to the plans of the CEO and top executive team. But nearly half of all stumbler Boards failed to meet basic criteria for a strong Board. They lacked sufficient industry and other relevant experience to be able to ask the right questions, lacked sufficient independence from executive management to be motivated to ask tough questions; and/or were too large for good debate. See below the excerpt from an analytical table on the quality of stumblers’ Boards of Directors. It shows that many lacked sufficient non-executive directors with relevant industry experience.

Fig 2. Quality of Board of Directors (excerpt)

Size: # of Board members, Independence: # of non-independent Board members excluding the CEO and CFO, Industry experience: # of independent Board members (# other non-executive directors, excl. retired execs and employee representatives) with industry experience.

Source: Ashridge Strategic Management Centre

Implications for Stock Selection

The study on stumbling CEOs provides some insights that can help stockpickers. To avoid putting stumblers in the portfolio, in addition to giving due consideration to a company’s business model, its financial position and strategic development, a great deal of attention should be devoted to its corporate governance and especially to its choice of CEO and other members of the top executive team. Even for a large company, senior leadership is crucial to performance and specific factors should be present: 1)relevant career experience and education of CEO; 2)independent Board equipped with necessary industry experience to challenge and advise the management; 3)sustainable strategy consistent with core business development and top team capabilites.

1 – The study was conducted in cooperation with Felix Barber and Jo Whitehead, Directors of the Ashridge Strategic Management Centre at Hult International Business School;

2 – Many CEOs Aren’t Breakthrough Innovators (and That’s OK), Harvard Business review, September 2015,

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Quality companies should exhibit robust stock market performance even in difficult times. To find out what makes for strong performance, it is common to look at success stories to find out what they do right. It is less common but, if your concern is downside risk, perhaps more valuable to look at CEOs that performed poorly and see why they made mistakes. HQAM recently carried out a study with the Ashridge Strategic Management Centre (ASMC) at Hult International Business School of “stumbler” CEOs – CEOs that underperformed the market by 25% or more in the CEO’s last two years in office. Nearly 10% of all CEOs of top 100 companies in the USA and Europe leaving office in the 10 years from 2007 to end 2016 were stumblers. Companies are often discrete about why the CEO is leaving. A few of these CEOs were not held to blame for company performance. For example, Patrick Thomas stepped down as CEO of Hermes after a substantial fall in the stock market price in his last two years in office. But Hermes price had been artificially inflated by speculation of a hostile takeover. And Thomas was the exception that proves the rule; most of these poor performing CEOS were fired and many more left under a cloud.

We looked at the statistics on all these 65 “stumbler” CEOs to understand their distribution by regional market and industry and then worked up case studies on 47 of them to get beneath the surface and understand how corporate strategies, top management background and Board composition were influencing performance.

Underperforming CEOs: regional and size differences​

Fig 1. Regional differences​

Source: Hérens Quality Asset Management

Our sample consisted of 594 CEOs of top 100 US and European companies over the period from 2007 to 2016. We have found European CEOs in the sample to have a substantially greater propensity to stumble than US CEOs. This difference is largely explainable by differences in the average size and market capitalization of US and European companies. As shown in Exhibit 2, smaller companies are more likely to stumble than larger ones, which is particularly well-seen in the US, where the portion of underperforming CEOs to the total number of smaller companies’ CEOs reaches over 30% rate.

Fig 2. Underperforming CEOs in % of total

Source: Hérens Quality Asset Management​

Underperforming CEOs: allocation by industry​

More interesting are the differences by industry. Locating the underperforming CEOs on the industry chart, one can clearly see that the largest contribution in the US is provided by the Energy and Financial sectors, followed by Materials and Information technology sectors. In Europe Financials are also in the lead, while IT, Materials and Utilities also have significant numbers of poor performing CEOs.

On the same chart we have also plotted the relative exposure to the industries in the Herens Quality portfolio. The Herens Quality portfolio is underrepresented in Energy, Financials or Utilities sectors. So, investing in the Quality style does indeed help reduce the risk of selecting stumblers.

The exception is information technology industry, which also supplies a significant number of the underperforming CEOs. So, the selection in this sector would be the key to success to avoid the severe undeperformance cases.

Figure 3: USA Industry sectors: Share of underperforming CEOs to total number of CEOs, relative exposure of USA Quality Portfolio (Source: HQAM)​

Figure 4: EU Industry sectors: Share of underperforming CEOs to total number of CEOs, relative exposure of EU Quality Portfolio (Source: HQAM)​

A richer picture appears if instead of classifying Consumer companies into Consumer discretionary and Consumer Staples, we classify them into consumer goods producers and retailers. Both consumer goods producers and retailers are favoured industries for the HQAM quality portfolio. But retailers have a much higher propensity to stumble than consumer goods producers.


The industry mix in the HQAM quality portfolio, with a much lower share of financial services, energy and materials companies, substantially reduces the probability of selecting stumbler CEOs with marked underperformance. But all sectors have some stumbler CEOs. In an upcoming white paper, written together with ASMC, we look in detail at stumbler CEOs and their track records to identify “markers” that make it possible to reduce the risk of selecting stumbler CEOs regardless of industry.

For HQAM corporate governance and CEO assessment is an important aspect in the investment process. It is not only the business model, which influences the corporate performance, but it is also the personality of CEO, the person in the lead (more can be read on CEO inluence on stock price in our previous article (link to article)).

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