Shooting Down Hired Gun CEOs
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Chief executive officers that came from outside the company at SuperValu (NYSE: SVU), J.C. Penney (NYSE: JCP), Best Buy (NYSE: BBY) and The New York Times (NYSE: NYT) have done little to inspire confidence with the investment community, with the shareholders paying the ultimate price.
Best Buy, J.C. Penney and The New York Times have all recently announced the hiring of new chief executive officers from outside the ranks. Wall Street was not impressed: In recent market action, Best Buy has fallen by 14.60%. The New York Times is down for the same period. The problems at J.C. Penney have it down by almost 40%; with SuperValu off more than 70% through August.
According to Jim Skinner, the former chief executive officer at McDonald's (NYSE: MCD), the mere act of hiring from outside the company is a negative signal to investors. About this Skinner observed that, "If you (as a leader) don't get the results, the board and other people will start second-guessing whether you have internal candidates or not because (it's) all part of the same strategy. If we're winning, everybody's winning. If we're not winning, everybody's losing."
Skinner was replaced at McDonald's by Don Thompson, who has been toiling for 22 years at the company that made The Golden Arches recognized around the world and a highly desired holding for investors.
Wall Street will accord a premium to companies that excel in developing future leaders. In this regard, both General Electric and IBM have always been admired for the management team the culture of each organization develops. Creating capable C-level management is the sign of a superior organization, which is rewarded by the investment community. The share prices of IBM, General Electric and McDonald's are testament to that rendering of investment capital.
Thomas Saporito, Chairman and CEO of RHR International, a global executive talent firm, noted that companies that develop chief executive officers internally perform better. He attributes this to "less risk and better yield in having an internally generated successor..." There is no doubt that a chief executive officer who rises through the ranks knows the company better than one hired away from another company.
The best sports teams are those that draft well or develop players through a farm system, not hire expensive free agents. The Washington Redskins for what seems to be every year since the previous owner died and this season's Boston Red Sox and Miami Marlins are yet the most recent examples. For the flip side, see the movie "Money Ball" which details the success of the Oakland Athletics in winning through bringing players up through the ranks rather than luring expensive free agents to The Bay Area with out-sized pay packages for what often times turns out to be an underperforming prima donna (again: see Washington Redksins, Boston Red Sox and Miami Marlins).
Hiring a chief executive officer from the outside is similar to choosing to expand a company through a mergers and acquisition strategy rather than organic growth. Developing from internal operations is always the most efficient way to expand as it utilizes the natural base of resources, not an external stimuli. About this, Anand Chokkavelu of Motley Fool wrote in "The 100 Things I've Learned in Investing," that, "Mergers and acquisitions are overrated. Somewhere between 50% and 85% of mergers fail to boost value. The frequency of achieving promised "synergies" should be filed somewhere between unicorns and no-hitters." It looks to be the same level of success for chief executive officers brought in from outside the company.
Best Buy, J.C. Penney, SuperValu and The New York Times all had massive problems long before a new chief executive officer was hired externally. But, when a company demonstrates that it can develop key executive leadership, Wall Street rewards the firm through raising the share price. That is only natural as a high achieving CEO that climbed up the management ladder and was promoted due to superior performance will lift the output of the company due to their peerless knowledge of its operations. A chief executive officer from the outside, by the very nature of their hire, cannot hope to have this organizational knowledge. From that, the shareholders suffer the wrath of Wall Street.
Fool blogger Jonathan Yates does not own any of the stocks mentioned in this article. The Motley Fool owns shares of Best Buy, McDonald's, and SUPERVALU INC. Motley Fool newsletter services recommend McDonald's. 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.