Source: The Economist: Schumpeter
When retired chiefs make a comeback their return is often less than triumphant
IT SOMETIMES seems as if there is nothing but second acts in American lives. Bill Clinton has had more comebacks than Elvis, most recently as a global statesman. Mark Sanford has just got himself elected as a Republican congressman for South Carolina even though his governorship of the same state was consumed in a fireball of adultery and divorce. Donald Rumsfeld is resuming his career as a management guru, with a new edition of “Rumsfeld’s Rules”, having previously put in two innings at the Pentagon. And it is not just in American life. Shinzo Abe is having his second go at being prime minister of Japan, and Nawaz Sharif his third in Pakistan. José Mourinho is set to return to manage Chelsea football club after a six-year absence.
And two prominent second acts began recently in the American corporate boardroom. On April 8th J.C. Penney, a department-store chain, sacked its chief executive, Ron Johnson, after just 17 months and brought back his predecessor, Myron “Mike” Ullman. Then on May 23rd Procter & Gamble, the world’s biggest maker of household products, sacked its boss, Bob McDonald, replacing him with his predecessor, A.G. Lafley. This sort of thing is surprisingly common: in “The Market for Comeback CEOs”, Rüdiger Fahlenbrach, then at Ohio State University, studied 275 publicly traded American firms whose CEOs had stayed on the board after retirement and were still around when the company again needed a new CEO. About a quarter rehired the old one instead.
The most important category of boomerang bosses consists of founder-CEOs who return to try to fix their ailing creations—such as Steve Jobs at Apple, Charles Schwab at the stockbroker of the same name, or Howard Schultz at Starbucks. In other cases those returning are hired hands (albeit often with big shareholdings in the company) brought back because their successors have got into trouble.
The best argument for bringing back former CEOs is that they are known quantities, and will thus reassure both employees and investors. Another is that they know as well as anybody what nasties are hidden in the hold. Mr Fahlenbrach discovered that the share price of companies with comeback CEOs tends to take a dip in the short term but performs better in the long term.
Several returning bosses do exceptionally well. Steve Jobs’s second coming at Apple (1997-2011) was more successful than the first (1977-85): he rescued the firm from near-collapse and made it the world’s most successful tech company with a stream of revolutionary iProducts. Mr Schwab transformed Charles Schwab into a full-service money manager in his second incarnation in 2004-08. The share price of Starbucks has more than trebled since Mr Schultz returned to the helm in 2008. When Steve Luczo came back as chief executive of Seagate Technology in 2009, shares in the maker of disk drives were worth $5; today they are $43.
But there are good reasons to worry about boomerang bosses. Their return almost invariably signals that the company is in deep doo-doo, and often the mess they are brought back to fix is one they left behind. The business they built may not have been sustainable; the deals they did may have looked good at the time but were bound to come unstuck eventually. And succession planning is a key part of a modern boss’s job: if the chosen successor makes a hash of things, that reflects badly on the chooser. Calling back a boss is rather like calling back a plumber: something you do only in dire circumstances and with a bitter sense that he should have done the job properly in the first place. Even in cases where the old bosses left on a high, they went for a reason—because they had reached a certain age (Mr Lafley is 65) or wanted to spend more time playing golf. They will not necessarily apply the same energy to the job second time around.
Examples of failed returnees abound. The most spectacular failure was Kenneth Lay, who returned as CEO of Enron in 2001 when Jeffrey Skilling’s frauds came to light and who saw the company crumble in his hands. Xerox’s stock tumbled by more than 60% during Paul Allaire’s second innings as boss (which lasted only 15 months). Jerry Yang failed dismally in his second stint at the helm of Yahoo. Michael Dell has been battling to stem his company’s decline in his second incarnation as CEO, though there are a few signs that things are turning around.
Only as good as their latest role
Mr Lafley and Mr Ullman will be well aware that the record for boomerang bosses is distinctly mixed. They know that they are not being brought back to captain the ship for another long spell, only to put it back on course, restore confidence and find a better successor this time. They will also be aware that they are taking the helm in stormy seas. William Ackman, an activist investor, agitated for the sackings of both Mr McDonald and Mr Johnson. He will undoubtedly be back, seeking the removal of Messrs Lafley and Ullman, if the two companies do not improve their performance promptly.
Mr Ullman will have the hardest time. His predecessor may have been guilty of errors in both strategy and tactics: he tried to take lessons that he had learned as boss of the Apple stores and apply them rigidly to J.C. Penney, a quite different sort of retailer, and he refused to test his ideas or listen to objections. But he was right that the company has a problem: its obsession with discounting put it on a treadmill of endless promotions and diminishing returns. Mr Lafley has far more resources to draw on. For all its recent failings P&G is still one of the world’s greatest corporate machines. But he also has the most to lose: he has already seen his reputation as one of America’s outstanding CEOs tarnished by the failure of his hand-picked successor, and may lose it altogether if P&G is not well on the mend when he, once again, hands it on to a new man or woman.