Beware superstar CEOs
Americans love stars. Celebrities, athletes, politicians and, yes, corporate executives, writes Steve Schaefer.india Updated: Oct 21, 2009 15:07 IST
Nearly 20% of the 3,000 largest publicly traded companies in the U.S. change their CEO or CFO in a typical year, and the chance to put a big name in the C-suite is alluring to corporate boards, says Renny Ponvert, the founder and chief executive of Management CV, a firm that analyzes management teams and executive changes for a client base of institutional investors. One of the biggest mistakes boards can make is reaching outside company ranks for a big-name executive who turns out to be a poor fit.
"There are times when [an external hire] is justified," Ponvert said, particularly for companies in need of a complete overhaul, but in most cases Management CV favors internal promotions. Executives from within "know where the skeletons are buried," Ponvert believes and often have a better understanding of the changes that need to be made right off the bat with a brief adjustment period.
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However, internal promotions don't have the flash of bringing in a well-regarded, widely known executive from another firm, even though there is evidence to suggest that the shareholder enthusiasm that accompanies such hires is often fleeting.
A 2006 study in the Harvard Business Review on the portability of leaders found that of 20 selected companies that hired a former General Electric ( GE - news - people ) executive as their CEO or CEO-in-waiting from 1989 to 2001, all but three enjoyed a pop in their stock price on the news. The thinking goes that since GE is known for breeding top-flight executives, hiring one of their alumni should be a no-brainer. In reality, it's not that simple. Just ask Home Depot ( HD - news - people ).
The home improvement chain hired Robert Nardelli for its top job in 2000, only to see its stock outperformed by smaller rival Lowe's ( LOW - news - people ) for years before Nardelli resigned in 2007, amid shareholder indignation over his pay package.
Boris Groysberg, an associate professor of business administration at Harvard Business School and one of the authors of the study, said that GE's reputation for producing strong leaders may be warranted, but only alumni whose strategic skills were a strong match with their new employers produced positive annualized abnormal returns (stock returns of a company relative to the returns of a similar group of companies matched by industry, size and stock volatility).
Groysberg says that search committees sometimes focus on the wrong traits. A proven cost-cutting specialist is hardly the best choice at a company looking to ramp up revenues, regardless of the past employers on his resume. By the same token, a company with an entrenched culture launching a new product is hardly a fit for a turnaround expert.
Ponvert doesn't disagree that "fit" is of primary importance, but even when things seem to match up, external hires often require more lucrative pay packages to come on board and sometimes get so many incentives up front that they have a hard time living up to their compensation.
In the clean energy space it's become enough of a trend that companies are essentially entering bidding wars for talent, resulting in some eye-popping packages. Ponvert points to Rob Gillette at First Solar ( FSLR - news - people ) as an example. A veteran of Honeywell ( HON - news - people ) division, Honeywell Aerospace, Gillette's pay "is bordering on the extraordinary," Ponvert says, and to justify his compensation the company would need to wildly outperform its peers.
According to an 8-K First Solar filed with the SEC, Gillette came on board Sept. 3 with an agreement to receive a $5 million signing bonus, $5 million in yearly grants of restricted stock, and various other options and incentives to go with his $850,000 salary and potential bonus. First Solar declined to comment for this story.
In other cases, the expectations and share price boost that come along with a new executive can raise expectations to unreasonable levels. Palm ( PALM - news - people ) Chief Executive Jonathan Rubinstein joined Palm as executive chairman in 2007 when private-equity firm Elevation Partners recapitalized the firm, and he was named chief executive in June 2009. around the time the mobile device maker launched the Pre Smartphone. (Elevation is also a shareholder in our parent company, Forbes Media.)
While his history plays well in the media--Rubinstein was part of the Apple ( AAPL - news - people ) team that developed the iPod--Ponvert is concerned that results won't match up to expectations. Management CV is not convinced that he'll be able to steer the Palm to operating results that will outperform industry peers, which investors seem to be expecting. Palm's share price was at $11.99 on June 10, the day Rubinstein was named CEO, and has risen nearly 37% since, comfortably outperforming Smartphone rivals Apple (+33%) and Research In Motion ( RIMM - news - people ) (-17%), as well as the S&P 500 (+16%). Palm declined to comment on the record for this story.
Sometimes, less heralded promotions and hires can often have more meaningful impact. Dirk Meyer was greeted coldly by the Street when he assumed the top role at Advanced Micro Devices ( AMD - news - people ) in 2008, but he has already made progress in fixing some of the missteps of predecessor Hector Ruiz, Ponvert said. Being promoted from within, Meyer was able to quickly gain traction toward reversing a string of poor results, and AMD is likely to benefit as capital spending eventually returns during the economic recovery.
Shares of AMD scuffled on the announcement of Meyer's promotion from chief operating officer last year, but perhaps subdued expectations are better than the pie-in-the-sky optimism that often comes with a "celebrity" hire, Ponvert suggested. An AMD spokesperson pointed out via e-mail that AMD has implemented a restructuring plan designed to reduce the firm's break-even point and divested noncore assets under Meyer's leadership.
Management CV, whose approach combines quantitative and qualitative analysis, readily admits that external hires are not always the wrong move. In many cases a mix of internal promotion and going outside the company to form an executive team creates "a strong management alloy," Ponvert said. He points to Walgreen ( WAG - news - people ), where Greg Wasson, CEO since February, is a lifer at the drugstore chain, but CFO Wade Miquelon was brought in from Tyson Foods ( TSN - news - people ) in May.
While Miquelon's compensation is 46% more than his predecessor's--the cost of doing business when you bring in outside talent--Management CV expects his cost-controlling skills and international experience to complement Wasson's intimate knowledge of the company. And the pair is certainly motivated to make it work: Walgreen's guidelines require Wasson and Miquelon to own company shares equal to certain multiples of their salary, ensuring they both have "skin in the game."
In other cases, it's not about what a new executive is bringing to the table but what goes out the door when their predecessor leaves the company. In the case of Teleflex ( TFX - news - people ), a diversified manufacturer that has expanded aggressively into health care products through M&A, Ponvert thinks the departure of CFO Kevin Gordon is a big concern. Gordon's skills as CFO, important given the financial and regulatory challenges associated with making acquisitions, will be sorely missed, he said.
The firm has not yet designated a replacement for Gordon, who resigned for personal reasons in September but will stay on board until early January. The company would not comment on its search.