CEO Succession = Nervous Investors
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CEO succession is a process fraught with uncertainty – something investors hate. Would Steve Jobs’ replacement at Apple (NASDAQ: AAPL), Tim Cook, kill the magic? It wasn’t until the company reported record financial performance that investors relaxed. This uncertainty, of course, is compounded by the unknowns currently generated by a global economy continually disrupted by technology.
So investors aren’t responding all that well to Berkshire Hathaway (NYSE: BRK-A) octogenarian head Warren Buffett’s coy statement in his annual shareholder letter. In it Buffett says he has designated a successor who doesn’t know that yet and Buffett isn’t telling the name. In addition, although 81, he has no intention of retiring. With the share price at $119,265, with a 52-week range of $98,952 to $130,304, investors ought to be nervous. No surprise, some of those analysts who have always seen weaknesses in Buffett’s game are using his present vulnerability to point those or new ones out. CNBC Bill Armstrong has noted that with zero-interest rates, Berkshire loses the advantage of its free float from its insurance businesses. Hedge fund manager James Altucher told the “Daily Ticker” that he won’t buy Berkshire Hathaway because of this lack of transparency about succession. Incidentally, there is one of those rumors in Wall Street circles that Jamie Dimon, CEO at JPMorgan Chase, might be the successor Buffett has designated. After all, Buffett told readers of his shareholder letter to check out Dimon's letter. Also a smart survivor, Dimon is Buffett's kind of guy.
Research confirms that investors should be wary about CEO succession. To begin with, as a Korn/Ferry International study shows, the transition often doesn’t work out. Of the 132 Fortune 500 companies replacing CEOs between 2003 and 2005, by 2010, most of them had underperformed the rest of the Fortune 500 and only 16 had consistent strong growth. In short, there’s no way of predicting how the fit of the company and the executive will pan out.
For instance, troubled J.C. Penney (NYSE: JCP) has new CEO Ron Johnson, former head of Apple retail. That should be a match made in heaven for a turnaround. With the 4Q loss of $87 million, though, there are plenty of bears, reports Motley Fool analyst Austin Smith, who does give it a “hold.” Since 2005, H-P (NYSE: HPQ) has had four CEOs. Only one so far – Mark Hurd – had refocused the firm and produced good financial results. The jury is still out on the latest, Meg Whitman. Because of this uncertainty, often corporations will keep in place a mediocre leader or one whose performance is declining.
Secondly, too often the board doesn’t take seriously its legally mandated role, according to the SEC Division of Corporate Finance Bulletin 14E, to make sure there is a succession plan in place. Only 39 percent of companies examined by the Conference Board had selected a new CEO through the board’s plan. Research by Heidrick & Struggles and Stanford University’s Rock Center for Corporate Governance found that succession planning only takes on the average two hours a year by the board. Therefore, if the CEO is ousted, the board hasn't given a lot of focus to who would be the right candidates to consider inside and outside the corporation to replace that leader. The Wall Street Journal notes that almost 80 percent of CEOs get the boot before retirement. In addition, there is the possibility of dying on the job. McDonald’s (NYSE: MCD) was prepared for that when in one year both CEOs James Cantalupo and Charles Bell died.
Third, designating a successor years before the CEO leaves can become the setting for a disaster, or at least a disappointment. Everything changes and as it does the heir in waiting might become a bad fit for what will need to be done. Also, the heir can tire of waiting or find a better deal and leave. That’s exactly what happened at AIG. In 2010, it appointed Steve Miller as the next CEO because the current one, Robert Benmosche, was suffering with cancer. Miller has since gone on to take the CEO job at Hawker Beechcraft.
Will Buffett’s heir, and maybe even the two back-ups, also bolt? At News Corp (NASDAQ: NWS), there’s speculation that Chase Carey, deputy chairman, president and chief operating officer, will succeed CEO Rupert Murdoch. But Murdoch, also an octogenarian, seems to have no retirement date. Could Carey be lured to the CEO job elsewhere and all the leadership skills he has been developing walk out the door with him? The lesson here is that timing is everything. That’s a major part of how the planning process should be done right.
Some investor groups such as the Central Laborers' Pension Fund and trade associations such as the Institutional Shareholder Services have been presenting companies with proposals that they disclose their succession plans. Those proposals by Laborers’ International Union of the North America have been accepted by a number of companies ranging from Verizon to American Express.
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