What makes it so hard to replace a rock-star CEO?
Apple (AAPL, news, msgs) 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, news, msgs), has no guarantee of continued success.
Some companies do fine when star CEOs depart. Nike (NKE, news, msgs) 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, news, msgs) 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.
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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.
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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 slowed down growth to focus on regaining that old panache.
Dell Inc. (DELL, news, msgs) 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.
Rock-star CEOsProblem 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.