Bob Iger Returns to Disney: How Do Boomerang CEOs Work Out?

The Wall Street Journal reports shocking news from Disney this morning.   CEO Bob Chapek, recently signed to a contract extension by the board, has stepped down effective immediately.  Former CEO Bob Iger will return to take the reins.  Iger, of course, presided over a long period of strong performance at the company.  However, Disney has struggled along multiple dimensions since his departure.   Iger's return prompted me to consider how "boomerang" CEOs have performed.   We all know about the high-profile success stories, such as Steve Jobs returning to Apple long after he was dismissed.   Is that strong return the norm or the exception?

Christopher Bingham, Bradley Hendricks, Travis Howell, and Kalin Kolev studied this question and published their findings in the MIT Sloan Management Review two years ago.  They found that, "Boomerang CEOs indeed performed significantly worse than other types of CEOs. On average, the annual stock performance of companies led by boomerang CEOs was 10.1% lower than their first-stint counterparts. These results held true even when we compared them with other (non-boomerang) CEOs who were hired in times of crisis."

Why might boomerang CEOs struggle, on average, during their return?  First, they might be trying to apply a tried-and-true formula for success, yet conditions and circumstances may have fundamentally changed since their initial departure.   Second, decisions late in their initial tenure actually may have caused some of the downturn in performance after their departure.  Owning up to that fact may be challenging for many leaders.  Third, the team at the top may have changed significantly since their first tenure.  Their earlier success may have had as much, if not more, to do with those talented team members as it did with their own capabilities.   Fourth, the new skills required to thrive in the current environment may not match the leaders' strengths.  Finally, perhaps the returning leader may not be as open to divergent perspestives as he or she once was.  As Iger himself noted in his book, 

"It’s not good to have power for too long. You don’t realize the way your voice seems to boom louder than every other voice in the room. You get used to people withholding their opinions until they hear what you have to say. People are afraid to bring ideas to you, afraid to dissent, afraid to engage. This can happen even to the most well-intentioned leaders. You have to work consciously and actively to fend off its corrosive effects.

Boards and returning leaders must, of course, also acknowledge the fact that they did not manage the succession well.  In essence, the boomerang CEO has some responsibility for having failed in one of the last crucial tasks faced during his or her initial tenure: a smooth transition for the successor.  Now, the boomerang CEO has to not only right the ship, but find a way to improve the succession and transition the next time he or she steps down.  Again, it's interesting to read Iger's own words:

We all want to believe we’re indispensable. You have to be self-aware enough that you don’t cling to the notion that you are the only person who can do this job. At its essence, good leadership isn’t about being indispensable; it’s about helping others be prepared to step into your shoes—giving them access to your own decision-making, identifying the skills they need to develop and helping them improve, and sometimes being honest with them about why they’re not ready for the next step up.

Failing to Prepare for a CEO Succession

Source:  CNBC

Yesterday, Starbucks announced the hiring of a new CEO -  Laxman Narasimhan.  His former organization's stock (Reckitt Benckiser) dropped by 5% upon release of the news, suggesting investors believe its a significant loss for that firm.

As most readers know, former CEO Howard Schultz had to step in as interim leader of Starbucks several months ago, after the departure of Kevin Johnson.   The move represented Schultz's second return to the firm after his long tenure as CEO. On two occasions, Schultz had to step in when the firm was underperforming, and in both cases, it appeared that Starbucks did not have a successor ready to take over.  Why was Starbucks not prepared for these two transitions?  Moreover, given the problems Schultz has unearthed and encountered during his few months as interim CEO, one wonders if the Board didn't act quickly enough to move on from Kevin Johnson.  

These changes at Starbucks came to mind when I thought about a recent paper published by qresearchers David Larcker, Brian Tayan, and Edward Watts. They found that, "many companies are slow to terminate underperforming bosses, get caught flat-footed when a CEO suddenly departs, and often fail to appoint a viable or permanent successor."  Here's an excerpt from the Stanford Insights article profiling this research:

Succession planning is a taboo subject that tends to be neglected in many companies, Larcker says. One reason is that directors may feel awkward about broaching the subject with CEOs, as it suggests dissatisfaction with their performance. “It’s like coming home from school with a bad report card and explaining it to your parents,” Larcker says. “It’s not a fun thing to do.” And personal ties can make directors go easier on the CEO.

One of the most striking findings unearthed by the paper was that 4 out of 10 CEOs retain their jobs despite five years of worst-in-class performance based on return on assets.  Larcker puts this down to risk aversion. A CEO search can be time-consuming and expensive, and the stakes are high. One study estimates the cost of appointing the wrong leader at more than $100 billion. Bad picks can cause stock price drops along with stalled momentum, lost customer goodwill, and diminished trust within the organization. “There’s a reluctance to do it,” Larcker says.

Why a CEO Perhaps Should Not Pick His or Her Successor

An interesting article on the Stanford Graduate School of Business website examines three key reasons why a CEO perhaps should not have a prominent role in selecting his or her replacement.  First, selecting a CEO is fundamentally different than hiring other top managers.  The outgoing chief executive often has no experience selecting a CEO, while many board members may have that type of experience.  Second, CEOs worry about their legacies.  As a result, an outgoing boss may pick someone who will preserve his or her legacy, rather than someone who will make bold, but necessary, changes.  Finally, people have a tendency to hire others similar to them in a variety of ways.  CEOs may do the same when selecting replacements.   I would add one additional reason.  The outgoing CEO may not recognize the future needs of the organization.  They may be looking backward at what has been necessary to make the company successful in the recent past (during their tenure).  The outgoing CEO may not recognize that new challenges and opportunities await, and those issues require a very different set of skills and expertise.