Companies that lose a star CEO with Jobs' stature -- such as GE, Dell and Starbucks -- often struggle. Here's why and what shareholders should watch for.
What makes it so hard to replace a rock-star CEO
Apple (AAPL.O) investors may be asking this question if Steve Jobs, now on a medical leave, fails to return and the company stumbles.It happens often, and the answer may seem simple enough: Rock-star CEOs are a select few. That makes them irreplaceable, right?
But it's more complicated than that, and the issues are important to investors.
A good chief executive like Jobs should be able to share his vision well enough that another charismatic leader can pick up where he leaves off. Yet even a groomed successor, such as the one who followed legendary Jack Welch at General Electric (GE.N), has no guarantee of continued success.
Some companies do fine when star CEOs depart. Nike (NKE.N) flourished for a long while after founder Phil Knight left, for example. But why do so many falter?
Management experts point to the following problems. Investors should keep an eye out for them because they portend trouble when the superstar CEO -- or even the merely human chief executive -- departs.
Problem No. 1: Visionaries hate competition.
It sounds corny, but it takes vision to become a rock-star CEO like Jobs, computer maker Michael Dell or Starbucks' (SBUX.O) Howard Schultz. Vision is that uncanny ability to spot a potential trend before anyone else, build a company that makes the trend happen and profit in the process.
To do all this, visionaries hire "implementers," not other visionaries, says Fariborz Ghadar, the director of the Center for Global Business Studies at Penn State. And that may sow the seeds of trouble later on, Ghadar believes.
When it comes time to leave, visionaries turn to their trusted assistants. But while they may have been great at implementing, they might not be so adept at spotting new trends soon enough to make adjustments and keep the business on top of its game.Starbucks may be a classic example. In 2000, Schultz was replaced as CEO by Orin Smith, the chief operating officer from 1994 to 2000. Starbucks continued its breakneck expansion, growing from 2,135 outlets in 1999 to 8,337 in 2004. The next year Smith was replaced by James Donald, a former CEO of supermarket chain Pathmark Stores. The expansion raced on.In the process, the company lost sight of Schultz's espresso-soaked vision and his commitment to exceptional service, says Robert Acri, the president of Chicago Investment Group. With the stock falling, Schultz stepped back in a year ago, and he slowed down growth to focus on regaining that old panache.Dell Inc. (DELL.O) lost sight of key trends after it was taken over by an operations chief, Kevin Rollins, in 2004, say analysts. On Rollins' watch, Dell didn't adjust to a shift in consumer preference toward buying computers in stores instead of online. Another poor calculation was figuring that the Dell brand name was powerful enough to withstand competitors' price cuts.The company faltered, and Michael Dell returned as CEO two years ago.
Problem No. 2: CEOs pick their own successors.
Boards often cede CEOs too much responsibility for grooming replacements, says Mark Van Clieaf of MVC Associates International, which advises boards on succession. Or even worse, weak boards allow their CEOs to select successors outright. "The CEO succession planning process should be owned by independent directors," Van Clieaf says.Outgoing superstar CEOs may pass over the best candidates in favor of friends or someone "in their own image," says James Post, a professor of management at Boston University, because they don't want to "see all their good work trashed."
"But this minimizes fresh thinking and the re- evaluation of 'the great one's' strategy," Post says. He believes this was part of the problem at Dell, where Michael Dell played a big role in the selection of his successor in 2004.
Other analysts say Citigroup's board made this mistake when it let storied CEO Sanford Weill pick his successor -- right-hand man Charles Prince. Originally a lawyer, Prince lacked the broad management experience needed to run a global financial supermarket, says Noel Tichy, a management professor at the University of Michigan's Stephen M. Ross School of Business. "Prince is a nice guy, but he was way out of his league," Tichy says.
Problem No. 3: The old CEO hangs around too much.
Rock-star CEOs have so much power they rarely get pushed out. They often stay as chairmen. They're often founders, major stockholders or both.
"They leave because they want to leave, and so they never completely leave," says Russell Walker, the assistant director of the Zell Center for Risk Research at the Kellogg School of Management.
This can be a big problem because without a clean break, it's tough for a successor to tweak the company's vision and strategy. "The board has to say to the old CEO, 'Get out of the way,'" says Constance Dierickx, a consulting psychologist with RHR International, which advises boards on strategy issues.
Generally, you want to look for signs that a board is in control of key strategy decisions, says Dennis Carey of Korn/Ferry International, an executive recruiting firm. "The first question I have for a board is, 'What's your strategy?'" Carey says. "They have to have a pretty fast answer."
Problem No. 4: A company's success is too tied to the CEO.
Companies often use their PR machines to build up the "godlike" status of rock-star CEOs, says Marshall Goldsmith, the author of a book coming out in February called "Succession: Are You Ready?"
These efforts generate a lot of positive news coverage. All the attention builds momentum among consumers and investors alike.
But the benefits vanish quickly if a company doesn't have another superstar waiting in the wings -- which is usually the case.In fact, the former CEOs sometimes seem to be waiting in the wings to return, even though that may not rekindle the magic. It hasn't happened at Dell or Starbucks yet -- though Jobs, pushed out in 1985, brought Apple back after his return in 1997.
Problem No. 5: A succession plan is 'too good.'
General Electric goes to great lengths to rotate promising top managers among many divisions, giving them fresh opportunities to prove they're good enough to be CEO.But there's a problem with this kind of planning: Managers who survive the rigorous competition only to get passed over then leave to become CEOs elsewhere. After General Electric chose Jeffrey Immelt to replace Welch in 2001, for example, it lost Robert Nardelli to Home Depot (HD.N) and James McNerney to 3M (MMM.N).
General Electric goes to great lengths to rotate promising top managers among many divisions, giving them fresh opportunities to prove they're good enough to be CEO.But there's a problem with this kind of planning: Managers who survive the rigorous competition only to get passed over then leave to become CEOs elsewhere. After General Electric chose Jeffrey Immelt to replace Welch in 2001, for example, it lost Robert Nardelli to Home Depot (HD.N) and James McNerney to 3M (MMM.N).
A simple trick for investors
Unfortunately, regulators don't make companies say what they are doing to plan for the replacement of the CEO. As a shareholder, it can be tough to track a company well enough to uncover any of these weaknesses in succession planning.So here's one simple test to see whether a company is really grooming potential CEOs. Check whether the managers just below CEO are getting the challenges they need to learn and qualify for the job, Van Clieaf says.
To do so, look at the annual proxy statement and make sure the CEO doesn't earn total pay that's more than three times the pay of any of the immediate underlings. If so, these top managers may not have enough responsibility to learn how to take over.It's an important issue because 129 companies in the Russell 2000 Index have CEOs who are 65 or older, Van Clieaf says. They'll be looking for replacements soon -- whether those departing CEOs are superstars or not.
And Apple? The good news for shareholders is that Apple passes this salary test easily, since Jobs earned $1 in each of the past two years, while the next four execs below him got $5 million to $8 million each. Beyond that, it's not clear who would replace Jobs if he did not return.At the moment, Apple has hot products such as the iPhone, and Jobs is scheduled to come back in July. But nervous investors who remember that Apple struggled the last time he left will no doubt be watching closely for his return.
