Lord Browne, who's resigned as CEO of BP, has been described as "the greatest businessman of his generation."
You'd expect, therefore, his contribution to BP shareholders to be obvious. But it's not. I ran a quick regression of BP's monthly returns since Browne became CEO in June 1995 upon the All-share's returns. Doing so produces an alpha of 0.43, with a p-value of 33.5%.
That suggests there's a fair chance that BP's true stock-specific returns under Lord Browne were zero.
And this is the most friendly interpretation. Regressing BP's returns upon All-share returns and changes in the oil price cuts this alpha by three-quarters, to 0.132, with a p-value of 73.7%. Throwing in other risk factors - value stocks, sterling, small caps - doesn't much change this picture. In some regressions, alpha's a little negative, in others a little positive. In all cases, p-values are high.
The obvious reading of the data, then, is that it's quite likely that Lord Browne has made no material contribution to shareholder wealth, because BP's returns can be explained by macroeconomic risk factors.
Now, there's no doubt that - until recently at least - Lord Browne was one of the most esteemed of British bosses. So, if even he cannot make a clear contribution to his business, who can?
Of course, you can quibble endlessly with this. What's the counterfactual? Is alpha a relevant measure of CEO performance? and so on.
But the message seems clear. It's hard to identify CEOs' performance.
This is one reason why I say managerialism is an ideology; the claim that managers can (except in rare cases) make a big difference to an organization doesn't leap out of the data.
Chris - did you allow for the fact that BP is like about 7% of the Allshare? This is going to bias your coefficient toward zero, isn't it?
Posted by: dsquared | January 15, 2007 at 03:02 PM
I didn't, but the bias is small. Using Datastream ex-resources index instead of the All-share gives us a Jensen's alpha of 0.59 (t=1.26), and an alpha of 0.218 (t=0.53) including the oil price along with the "market" index.
Posted by: chris | January 15, 2007 at 03:24 PM
For reasons best known to yourself, you seem to confuse BP's performance with that of its shares.
Posted by: james C | January 15, 2007 at 09:00 PM
It *could* be argued that he is a great businessman because he had the guts to move BP from global climate change/peak oil denial to admitting the obvious and trying to do something about it.
Since I know nothing about BP and its political environment, I've no idea whether this
(a) accurately represents reality rather than BP PR
(b) was in fact a difficult risky gutsy move.
Obviously we have Exxon as a counter example; but, in the middle, we have Shell which, while not quite as insane as Exxon, certainly to my mind brings up associations of exploding pipelines and toxic emitting refineries in Nigeria, rather than any sort of attempt to deal usefully with the 20 to 50 yr energy future.
Posted by: Maynard Handley | January 16, 2007 at 02:55 AM
Maybe Browne's 'inline' performance was actually a good performance given the oil industry's challenges (rising costs, access to resources etc). Would be interesting to see the same analysis for Shell over the same period. And given the long lead time for oil projects, it is hard to fully appreciate Browne's contribution at this point in time.
Posted by: King | January 16, 2007 at 12:48 PM