CEOs In Danger
October 1 2000 by Justin Martin
It’s always been lonely at the top. Now it’s treacherous, too.The fact that CEOs-are in the hot seat-or rather the ejector seat-is confirmed by business press headlines on a daily basis. During the past year, there’s been turnover at the top at such major companies as Coca-Cola, Procter & Gamble, Mattel, Xerox, and Toys ‘R’ Us. The list quite literally goes on and on. CEO tenure is becoming downright Hobbesian-nasty, brutish, and most of all, short.
Outplacement firm Drake Beam Morin recently surveyed some 500 large corporations across a range of industries and discovered that in nearly half the CEO has been in the job for less than three years. Two-thirds of the surveyed companies had replaced their top executive within the past five years. “It’s becoming a one-strike game,” says Phil Simshauser, a senior consultant at DBM. “CEOs don’t get three strikes like they did 10 years ago.”
Given all the tumult-and that the rules seem to be changing drastically-CE set out to collect and classify some of the signals that a CEO might be in trouble. Talking with dozens of experts, including headhunters, executive coaches, and directors of public companies, turned up a list of danger signs encompassing everything from bad blood with the board and defections of key personnel to conspicuously high compensation and technophobia. Along the way, we also came across a handful of CEOs enveloped in signs of clear and present danger.
Being adrift strategically is a sure danger sign. CEOs don’t-as a rule-answer the toll-free calls that come into customer service centers. The CEO of a manufacturing company is unlikely to show up on the factory floor and operate a lathe. But if the basic functions necessary to run an organization aren’t performed, and performed flawlessly, fingers point straight to the top.
“The CEO is the one who has to drive a company’s vision down into the organization,” says Mary Jane Range, president of Stamford, CT-based BTS Executive Search & Services. “It’s a big mandate. Today’s CEO has to be strategically focused, tactically talented, and has to constantly reaffirm the firm’s mission.”
Under that mandate, The Gap is a prime example of a major company that has lost its way, and CEO Millard “Mickey” Drexler is feeling the heat. In recent years, the San Francisco-based retailer has hitched its wagon to the notoriously fickle teen fashion market-in the process abandoning the basic-khakis strategy on which it built its reputation. The powerhouse retailer has also contended with cannibalization as its Old Navy stores stole bargain-hunting customers away from Gap outlets. Strategically, Drexler’s intended next move is a 180-degree pivot, literally going back to the basics.
Drexler-or any CEO flailing strategically-still has a shot provided he doesn’t start losing key lieutenants. Widespread executive defections was the preeminent danger sign mentioned by experts on CEO turnover. Losing one key person is a compliment; it means an organization is viewed by its peers as an admirable training ground. But when people start running for the exits en masse, a CEO’s days are numbered. Dayton Ogden, co-chairman of search firm Spencer Stuart, puts it succinctly: “You can be a brilliant strategist and visionary, but if you don’t have a good team to execute, you will fail.”
AT&T’s Mike Armstrong faces this very challenge. His strategic vision appears sound enough. He’s trying to wean the company from its core long distance business and guide it into new frontiers such as high-speed Internet service and cable TV. That’s a formidable enough challenge for a 123-year-old company. But the defection of roughly a dozen high-ranking executives since he took over the top job in 1997 has severely undercut his efforts to overcome it-and is putting Armstrong in an increasingly difficult position.
A poor relationship between the CEO and his board is another recipe for failure. These days, boards are no longer docile creatures, tucked in the pocket of a Peter Grace or Armand Hammer. Modern boards have become much more serious about their responsibilities, largely due to pressure from institutional investors. The board of McDonald’s routinely travels to places like Russia to visit restaurants and distribution centers. Some boards have initiated 360-degree reviews of the CEO. And almost all have started demanding frequent, open, and forthright communication from the CEO.
“Boards are watchdogs over the CEO to a much greater degree,” says Range. “CEOs, in turn, have to keep an eye on their relationships with their boards. They have to watch for signals of discomfort, withdrawal, or concern on the part of individual board members.”
This is doubly true for those CEOs unfortunate enough to have to answer to boards that include their predecessors. Durk Jager resigned as CEO of Procter & Gamble in June of 2000, having failed in an ambitious effort to shake up the company’s hidebound culture. By all accounts, he was seriously hobbled by having not just one, but two former P&G CEOs on the board-John Pepper and Edwin Artzt.
By contrast, when Bob Crandall closed out his two-decade tenure as chief executive of American Airlines, he elected not to take a board seat. He explained that decision by asserting that he wanted his successor Don Carty and other executives to be able to strategize “without having Bob Crandall glowering down on them from the end of the table.”
Even when the ex-CEO doesn’t haunt the new CEO from a board seat, his presence tends to be felt-often palpably. In fact, trying to fill the shoes of a legendary leader is a warning signal in its own right.
Consider Doug Ivester, who took over the reigns at Coca-Cola from Robert Goizueta. Ivester had served a long apprenticeship as an operations man and a loyal lieutenant to Goizueta. Upon assuming the helm, however, he was forced to contend with some very public controversies. Among these was an incident in Belgium in which 200 people became ill after drinking Coke, which led to the largest product recall in the its 113-year history-14 million cases. Ivester was widely viewed as having mismanaged the affair, inflaming the fury of Belgium government officials and politicians by failing to meet with them to discuss their concerns.
This, coupled with poor financial performance, ensured that Ivester’s tenure was brief. Still, some feel that despite his various miscues, following a legend may have been his fatal mistake. “I can’t imagine the board of Coca-Cola pushing Goizueta out for the same problems,” says Dennis Carey, a vice chairman at Spencer Stuart and co-author, along with Dayton Ogden, of CEO Succession. “The bar was much higher for Doug. It’s real tough to take bad news from the new player on the block.”
If Goizueta is a tough act to follow, imagine the challenge for Jack Welch’s successor. The front-runners are Jeffrey Immelt, who heads up GE Medical Systems, and James McNerney at GE Aircraft. Whoever wins that race becomes not only CEO, but also chief electrical officer-as in, a lightning rod. “I pity the poor guy who gets the job,” says Phil Lochner, a retired Time Warner executive who sits on several boards. “How do you follow a legend? At least for a couple years, people will compare Mr. X and Jack Welch. Mr. X is bound to come up short.”
But following a notorious-rather than legendary-CEO is no picnic, either. Shareholders are anxious to see the stock recover; employees want morale to improve at warp speed. If there’s a CEOwarning-signs common denominator, it’s lack of patience. Patience, whether among boards, shareholders, or employees, is a scarce commodity these days. With this in mind, it will be interesting to see how GE veteran Gary Wendt does at ailing financial services concern Conseco, having stepped into Stephen Hilbert’s hot shoes.
Mergers also serve as clear indicators that a CEO departure is imminent. It’s simple logic: post-merger, one CEO will stay and one will go. When Monsanto and Pharmacia & Upjohn announced their merger late last year, it was touted as a joining of equals. Neither company paid a premium for the other. Significantly, however, the new company’s name wound up being Pharmacia and Fred Hassan was named CEO. Robert Shapiro, CEO of the old Monsanto, was handed the title of chairman and will retire in 2001.
With the U.S. in the midst of a massive merger wave, the ranks of CEOs forced into a post-merger exit are swelling. In 1999, corporate America saw $3.4 trillion worth of merger activity, up from $1 trillion in 1995. The majority of these corporate marriages follow a pattern that’s elegant in its simplicity: the CEO of the dominant partner stays on, and the other leaves. That is, unless the newly formed company opts to install co-CEOs, in which case, at some point down the line, one co-CEO will stay and one will go. Witness the recent departure of Citigroup’s John Reed, who shared the post-merger CEO helm with Sandy Weill.
Conversely, failure to steer a firm through a merger can be a CEO warning signal. John Stafford, CEO of American Home Products has had three failed mergers in the past two years, including a recent abortive courtship with Warner-Lambert. (The pharmaceutical giant paired with Pfizer instead.) “If you’re not being called upon to be a merger partner, something is wrong,” says Leslie Gaines-Ross, who, as chief knowledge officer at Burson Marsteller, is responsible for the public relations firm’s CEO reputation surveys.
Personality vis-a-vis Performance
There’s an impression-widely held and mistaken-that CEO arrogance is a warning sign. Not necessarily. CEOs tend to be hard-bitten, egomaniacal, type-A sorts-it’s requisite to holding the job. In fact, arrogance and a whole host of other seemingly unbecoming traits don’t mean a thing in the abstract. Rather, the only real issue is results. “There may not be much downside to arrogance if you continue to perform,” says Lochner. “But the problems really start if you’re an unpleasant son of a bitch and things go bad.”
The CEOs of underperforming companies do tend to develop all kinds of foibles, tics, and unpleasant mannerisms. Where once they were bold, they become reckless; their plainspokeness transmutes into boorishness.
That said, greed is the exception, in that it’s never a good trait to reveal for reasons of enlightened self-interest, if nothing else. Savvy CEOs aim for compensation in line with that of their peers and commensurate with their performance. In fact, rocketing to the top of a highest-paid CEO list can really backfire. “It invites unwanted attention, unless you have sterling results to go along with it,” says David Dotlich, a partner at Portland, OR-based executive coaching firm CDR International.
For example, Charles Wang of Computer Associates was ranked by Forbes as the highest paid CEO in 1999, raking in $650.1 million. That was neither in line with Wang’s peers nor commensurate with his company’s performance. No doubt, the scrutiny invited by his massive pay package played a role in Wang’s recent “elevation” from CEO to company chairman. It’s worth noting, too, that Computer Associates made the “worst boards” listing in this issue (see page 40, “Boards on Trial”). Weak board, excessive pay-the math is pretty simple. Meanwhile, you don’t hear anyone complaining about the pay of Cisco CEO John Chambers, who came in fourth on the Forbes list.
Of course, the bottom line is the bottom line. A myriad of sins can be forgiven, provided a company manages good financial results. On this score, however, the standards are getting much tougher. Time was, companies competed against others within their own industry. For example, General Foods could have what was judged to be a good year if it did better than Kraft. Nowadays the benchmark is often broader market indices. The CEO of a sleepy utility may find company performance stacked up against the Nasdaq.
The timeframe for producing results is getting squeezed as well. Mattel CEO Jill Barad purchased a children’s software maker called the Learning Co., an acquisition that was both high-profile and high-cost ($3.6 billion). Barad made a bold promise that the company would provide an almost immediate profit boost. Instead, the Learning Company acted like an albatross, helping sink Mattel’s earnings $82.3 million into the red in 1999. By February of 2000, Barad was gone.
“An underlying factor in CEO turnover is the shareholder revolution,” says Russell Reynolds Jr., CEO of The Directorship Search Group of Greenwich, CT. “Shareholders demand performance and they have a very short fuse.”
Shareholders also demand clear communication. “You can survive a short-term blip if you get out ahead and communicate effectively,” says Peter Crist, vice chairman of Korn/Ferry International.
In such a climate, the inability to manage expectations with Wall Street or the investing community can quickly land a CEO in the line of fire. Not too long ago, Honeywell’s Michael Bon-signore surprised analysts with earnings for the second quarter of 2000 of about $.75 per share, roughly 3 cents less than predicted. What’s more, Bonsignore then lowered his company’s earnings estimates for the duration of 2000 and 2001. “Any surprise is considered bad,” says Gaines-Ross. “Michael Bonsignore totally surprised the analysts. That’s one of the top ways in which CEOs’ reputations are built. If you lose all credibility, you’re in real trouble.”
Welcome to the Real World.com
Dot-com CEOs are increasingly being held to these same rules. The advent of the Internet resulted in several giddy gold rush years, in which companies that couldn’t boast a cent of earnings saw their market valuations soar. CEOs of dot-coms graced magazine covers and became folk heroes, simply because they ran enterprises that were considered hip or glamorous. The fact that said enterprises were often light-years away from profitability was not held against them.
All that is changing. This year’s market volatility, a series of interest rate hikes by the Fed, concerns expressed by reformed new-economy boosters such as Abbey Joseph Cohen, and an article in Barron’s identifying companies that suffered from phenomenal “burn rates” are among the many factors that helped usher in a new-and far less tolerant-environment for dot-com CEOs. “Nine months ago, when the eighth pet.com [clone] was founded, the CEO said, `Yeah, there’s a big market,’ ” says Steve
Piaker, a partner with the Hartford, CT-based venture firm Conning Capital Partners. “I really laugh at that today. Not only would that CEO not get funded today, even the most successful [dot-corn] CEOs are being judged with a lot more scrutiny.”
Given its high-profile and impressive brand equity, Amazon.com has become something of a bellwether for the health and prospects of the dot-coms as a whole. Lately, CEO Jeff Bezos has faced some real trials: a searing burn rate, increased competition from the Internet operations of brick-and-mortar stalwarts such as Wal-Mart, and the departure of Joseph Galli, a talented second in command who had cut his teeth at Black & Decker. The consensus estimate is for Amazon to remain in the red until 2002, and that’s contingent on the company upping revenues more than five-fold.
“Jeff Bezos is definitely on the defensive lately,” says Trey Reynolds of The Directorship Search Group. And the same holds true for the CEOs of other capital-burning, negative-earning dot-coms ventures, who are finding that the rules are changing and an era of more traditional standards of accountability has begun.
But old economy CEOs who haven’t adapted to the new economy are also in trouble. Dot-coms may be going through some growing pains and a long overdue weeding out period, but the Internet is here to stay. Even CEOs of companies that are decidedly oldfangled and analog need to think of ways to augment their businesses over the Internet. CEOs who don’t have computers on their desks are giving off clear warning signs. CEOs who don’t do e-mail-or those who delegate this task to an assistant-are sitting under flashing danger signs.
Rules about the speed of doing business have also changed irrevocably, thanks to the Web. It used to be crucial to tinker endlessly with a product-conducting voluminous research, rejiggering the promotional campaign-to make sure it was 100 percent perfect before placing it on the market. Now speed is of the essence. Sometimes it’s far better to get to market fast and be only 85 percent right. Successful CEOs need not only adapt to the Internet, but also to the new changes in corporate culture that it has wrought.
In the final analysis, it’s sheer accumulation of the various aforementioned danger signs that usually spells doom for a CEO. Even one is bad, no question. And, depending on circumstances, one strike may be all a CEO gets.
Of course, there are CEOs who survive for years with one particular warning sign taped to their backs like a target. Michael Eisner, who’s pocketed conspicuously high pay packages granted by Disney year upon year, is one example. But CEOs who rack up several signs concurrently are usually toast.
Al Dunlap is the poster boy amassing multiple transgressions. During his four-year tenure with Sunbeam, he botched strategy, battled with the board, surprised analysts negatively, and was grossly overpaid, earning $100 million. When the axe fell, there was a sense of inevitability-he’d racked up warning signs enough to choke a freeway. Even his one and only sister wasn’t surprised, or especially sympathetic. “He got exactly what he deserved,” said Denise Dunlap.
Seven DEADLY Sins
Any one of the following can be a warning that a chief executive is about to become a brief executive:
1. Botched strategy: Job one for CEOs tends to be laying out a strategic vision. If the charges remain uninspired, the buck stops at the top.
2. High level Defections: In a fluid and dynamic economy, losing one or two key players is the norm, alarmist headlines notwithstanding. But there’s trouble afoot when top people are leaving in droves.
3. Bad Blood with the Board: CEOs fight and struggle to land the top job, only to find they have 12 or 15 new bosses. Problems begin if they don’t serve them well, communicating often and with great candor.
4. Stepping into Big Shoes: Succeeding a legendary CEO can spell trouble from the start. It’s hard to build loyalty, and harder still to make organizational changes. Hardest of all is competing with the reputation of a predecessor whose status is rapidly changing from mortal to mythical.
5. Poor Results: Failure ain’t what it used to be. Nowadays, CEOs need not only beat their nearest competition; they must outperform broader market indices. Meanwhile, given roughly 20,000 public companies to choose from in the U.S. alone, shareholders have scant patience for laggards.
6. Badly Managed Expectations: Along with boards, CEOs have another massive constituency these days-the investment community. Failure to keep Wall Street analysts in the loop can spell failure for a CEO.
7. Technophobia: Being the CEO of a lumber company or an auto parts distributor isn’t exactly glamorous. But it’s downright dangerous if that CEO doesn’t have a measure of computer literacy and an Internet strategy.
Justin Martin is a New York City writer whose work has appeared in Fortune, Newsweek, and Worth. His biography of Alan Greenspan is forthcoming from Perseus Publishing.