CEO Exits: More Top Execs out the Door

In January, 123 CEOs left their posts, a 48% increase from December, and a 28% increase year-over-year, according to Challenger, Gray & Christmas Inc., a Chicago-based outplacement company.

“Companies were focused on cutting costs and doing more with less,” company CEO John Challenger noted in a press release. "Now as jobs begin to trickle back and other factors signal economic growth, companies may try to find leaders who are able to drive expansion.”

For investors, the turnover may matter less than how well the leadership handoff proceeds. A smooth handoff is always better for the company and shareholders, says Peter Thies, senior partner for Leadership and Talent Consulting at Los Angeles-based Korn/Ferry International (NYSE: KFY), an executive recruitment company.

Take Yahoo Inc. (Nasdaq: YHOO) (please!), whose Chairman Roy Bostock (who recently stepped down along with three other board members) fired CEO Carol Bartz over the phone in September. The contentious relationship between the board and its CEO led to the airing of the company’s dirty laundry in public, contributing to perceptions that the company is in disarray, which didn’t help its stock price. “The fact that the board and the outgoing CEO had that cantankerous of an ending makes you wonder -- it had to be a bad situation for some time,” Thies says. “Yahoo is not a shining example of well done.”

Yahoo picked its new chief executive last month, Scott Thompson, former PayPal CEO.

Hewlett-Packard Co. (NYSE: HPQ) seems to have installed a revolving door just for its CEOs. In a span of a few years, it had several embattled departures. Carly Fiorina was forced to resign in 2005, citing differences with the board on strategy, followed by Mark Hurd, who resigned after claims of sexual harassment, followed by Leo Apotheker, who made decisions to exit Hewlett-Packard business lines, which were then reinstated by its current CEO Meg Whitman, former eBay Inc. (Nasdaq: EBAY) chief executive.

Bank of America Corp. (NYSE: BAC) has also had a tough row, Thies says. Days may be numbered for current CEO Brian Moynihan. Moynihan never seems to get a vote of confidence from his board, Thies says, noting that Moynihan was the one who introduced that $5 debit card fee, which was dropped because of customer outrage. Industry watchers blame the bank’s board as much as Moynihan. “I’ve never met him first hand, but he’s always questioned. That’s not fair to Moynihan, and it’s not good for the board to have to deal with that.”

Boards would better serve companies and their shareholders if directors spent more time developing CEO succession plans and coming up with ways to identify and groom potential internal and external CEO candidates, Thies believes. Companies should have two to three generations worth of CEOs in the pipeline.

Thies notes that some CEOs are needlessly fired. “Sometimes, the grass looks greener on the other side. The assumption is the current CEO isn’t able to help the company grow; therefore, we need to get somebody in here to do it better and faster. But boards can have unrealistic expectations of growth rates, and may not give CEOs enough time to grow a business.”

As the economy improves, many company boards, driven by the thirst for growth, will look externally to find leaders. But in many instances, an inside choice is the better one, Thies explains, adding, “Most boards don’t do enough to understand the internal pipeline.”

Thies cites McDonald’s Corp. (NYSE: MCD) as a company with an exemplary CEO succession plan that has mined a bench of executives within the company. A few years back, two of the company’s CEOs died within a year, and yet McDonald’s successfully filled the voids. “From a shareholder value perspective, they did it right.”

Procter & Gamble Co. (NYSE: PG), under former CEO A.G. Lafley, designed a leadership development process that enabled a smooth transition in 2009 from Lafley to current CEO Bob McDonald. “Really well done,” Thies says. Apple Inc. (Nasdaq: AAPL) also had a successful handoff after the death of Steve Jobs last year. Tim Cook was a good choice, Thies feels, but the company could’ve done a better job at letting investors know it was ready for a handoff. “It was an example where Apple didn’t do great marketing. The company does great marketing of its products, but didn’t do marketing of its own skill in CEO succession.”

Companies also need a process of exposing board members to other executives within the company, who might be potential leaders. “Most boards don’t have firsthand knowledge of people below the senior team of a company.”

At MasterCard Inc. (NYSE: MA), Thies says, CEO Ajay Banga has a process that invites board members to meet with company executives at informal settings, such as cocktails and dinner, not just at presentations. An executive may be a good presenter, but not a good leader. “We would call that a great practice in CEO succession.”

Many boards are afraid to broach the topic of succession with CEOs. They don’t want to scare them. But in the first two to three years of a CEO’s tenure, boards should identify candidates and have a process in place to groom them.

“The leader has to say: ‘This is not about me.’ This is about shareholder value,' Shareholders throw stones at boards for lots of things. Our view is that it's fair for investors to demand better practice from most boards on CEO succession because the fact is, most boards aren’t good at it. And it matters.”

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