CEOs: Too Much "Off With Their Heads"
Jane is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
During these unusual times, angst-ridden investors seem to be ousting chief executive officers (CEOs) prematurely. During the more staid 20th century, they might have given them more time to turn around a troubled company or one simply not growing fast enough. The rationale back then tended to favor the belief of sticking with the devil you know. Capital was relatively patient. It was rare for a major company like IBM to lose patience and oust CEO John Akers in the early 1990s. Now, of course, that's the new business as usual.
According to the Booz & Company’s annual survey of CEO turnover, the average tenure is about 6.4 years versus 8.1 years a decade earlier. Before that, CEOs could expect to retire in the job. In 2011, Booz reports, 350 of the largest 2500 public companies around the globe appointed new CEOs. The current edition of THE ECONOMIST sums up the recent Booz survey findings and speculates on implications. The discussion is housed in the "Creative Destruction" section of the publication. That placement may be ironic in that the baby might be thrown out with the bath water.
The scary part of all this is that frequently the new appointment has followed an earlier one which didn’t work out and perhaps even one before that which also disappointed. Impatient capital has its finger right on the trigger these days. Yet, where there is the most turnover, there is often the most long-term difficulty in establishing the platform for a transformation and getting it rolling.
Take Hewlett-Packard (NYSE: HPQ). It had recently gone through three CEOs. Some business growth experts like Adam Hartung, author of “Create Marketplace Disruption,” aren’t too bullish on the fourth, that is, Meg Whitman. During the past two years the stock had dropped 60%, resulting in a loss of market capitalization of $60 billion. Currently the stock is at 22.23, with a 52 week range of 20.57 to 37.70.
However, suppose in 2005 the Board of Directors, goaded by shareholders, had given a specific set of marching orders to Carly Fiorina, along with a face-saving way she could retain her credibility and authority while still changing course? By now the company might have gravitated out of PCs and printers and into cloud computing services and tablets. We recall her successors Mark Hurd and Leo Apotheker didn’t move the dial on transformation. Betting on a new CEO to replace the one in a distressed company frequently is, to use the cliche, changing deck chairs on the Titantic.
AOL had already fallen from its earlier greatness when Tim Armstrong took the helm and then brought it public in 2009. An added problem was that demand for its dial-up connection to the Internet, just like AT&T’s landlines, was falling off the cliff, slashing revenues. Armstrong tried this, such as hyperlocal news, and he tried that, such as bringing in Huffington Post. Among other investors, Starboard became impatient. But now even Armstrong’s most severe critics are admitting signs of a transformation. One of them seems to be associated with how Armstrong is leveraging video. The stock is at 27.48, within a 52 week range of 10.06 to 27.94.
Another example of investor patience with a CEO which may be paying off could be GE (NYSE: GE). On September 7, 2001, just in time for two brutal recessions to hit America, Jeffrey Immelt became the CEO. Started in 1892, this company sought stability and Immelt was only the ninth CEO. That organizational ethos might have bought him the time he needed to guide the company into the 21st century and through a global financial collapse. The day he began the stock was at 40. Some contend that it was overvalued due to the halo effect of the number-eight CEO Jack Welch. Today it’s back on the way up, at 19.20. During the past 52 weeks it was as low as 14.02. Optimism is filtering back in with some even contending that, given a PE ratio of 10.75 and a PEG of 0.99, it is undervalued. Its credit rating was AAA. That’s gone but could come back now that its one time crown jewel GE Capital, which became its Achilles Heel, has been recovering since 2011. It ended that year ahead of plan, with a net investment of $445 billion.
What if investors had pushed out Immelt and replaced him with an outsider? Likely the turnaround wouldn’t have happened or not as quickly. Insiders, found Booz, have an advantage because they understand how the whole enchilada actually operates and can change. During 2009-2011, insider CEOs yielded shareholders an average return of 4.4% versus 0.5% for outsiders.
Given these track records as background, it might be on the money for investors to stick with the incumbents at companies in crisis. For example, at JPMorgan Chase (NYSE: JPM) Jamie Dimon has demonstrated that he is a leader and that he understands how to create wealth for both shareholders and clients. Before this crisis his major challenge was a stock price which some viewed as undervalued. That might not only continue, but worsen. However, that might be added incentive to buy into a company with good fundamentals.
Another keep could be Ron Johnson at troubled J.C. Penney (NYSE: JCP). Some of us view his Fair and Square strategy as flawed. His goal has been to eliminate deep discounting in order to boost margins. However, the company might not survive long enough in the dog-fight mid-level retail marketplace for that to happen. The board should and could motivate Johnson to retrofit the tactics so that margins could increase and still the excitement of sales, even daily deals, return. Retail is the world according to bargain-hunting as a combat sport brought mainstream by the old Filene's Basement.
Johnson wouldn’t be alone in course correction. After stumbling in its efforts to migrate a bit upscale, Wal-Mart (NYSE: WMT) is returning to its discounting roots. Shareholders seem to have given current CEO Michael Duke a pass on that one. Pressure to oust him is associated with the alleged bribery in the international division which he had overseen before becoming CEO. If shareholders succeed, that might be a dangerous move since the whole low-end retail sector, ranging from Target to dollar stores, is in transition. Upgraded Family Dollar could siphon away customers from Target and Wal-Mart.
Shouting “Off With Their Heads” and going through with it may feel good. Investors might have the (temporary) satisfaction of being activists. But in the longer term it could prove out to harm them. Transformattion requires trial and error and that requires time.
janegenova has no positions in the stocks mentioned above. The Motley Fool owns shares of JPMorgan Chase & Co. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.