Sometimes it’s hard to tell whether a CEO’s really in trouble, or if someone’s just looking for attention.
Without a connection on the board, it’s impossible to know for sure.
Still, there are a few things to look for that let you distinguish situations like Ron Johnson’s, where an exit is likely, from the talk about Apple’s Tim Cook, which is just speculation.
People start jumping ship
Relatively few executives will leave when they feel a turnaround’s likely and they can claim part of the credit.
But nobody wants to go down with a sinking company. High-profile executive departures usually aren’t a good sign, especially when they come in waves.
Taking forever to replace a high-level departure could be another worrying sign. Research from Northwestern’s Jennifer Brown and David Matsa finds that companies in distress have a big problem finding talent.
The critics have muscle
There’s a world of difference between comments from anonymous Wall Street sources, from the actual analysts who cover the company, and activism from big-time investors.
Some external sources are more credible than others. Ex-JC Penney CEO and retail legend Allen Questrom’s criticism of Ron Johnson struck a chord, for example.
But criticism means more when there’s significant money involved, or when people who cover a company for a living and for investors’ profit start to get worried.
Particularly, when a large activist investor gets involved, like Dan Loeb did at Yahoo under Carol Bartz, it means that not only do they think the CEO’s bad, they think they have enough muscle to get them out.
Frequently, they do.
Things get leaky
The first sign of unrest is when stories start coming out about a negative company culture or problems in the company on the ground, from retail workers or low-level employees.
That doesn’t mean all that much. You can find a disaffected employee wanting to vent just about anywhere.
When those complaints and sources start to come from senior management, you have a bigger issue.
There are crystal clear strategic errors
It’s one thing to underperform in a tough market or due to long-term trends. It’s another entirely if a signature acquisition fails, or if a major initiative fails.
The fact that customers were alienated by Ron Johnson’s changes to discounting and merchandise highlighted the fact that he didn’t test them first.
Stories are incredibly powerful. When there’s a narrative of failure or bad management, the media, investors, and customers can latch onto, it can be difficult to stop.
They miss the numbers people really care about
Whether its the sales of a signature product, profit margins, or specific costs, there are benchmark numbers that people care about for different companies, beyond just revenue and earnings per share. In JC Penney’s case, it was same-store sales which fell by a staggering 32% in one year.
Another sign is when they miss their board’s goals in addition to Wall Street’s. A board takes a longer-term view of the company than Wall Street’s quarter-by-quarter approach, and has deeper access to the company’s operations and finances. When their goals are repeatedly missed, it’s a big warning sign.
How can you know what a board’s expectations are? Every year, public companies file a proxy statement (DEF 14A) with the SEC. It outlines what CEOs are paid, what parts of their compensation are performance-based, how it determines stock grants, and so on. When a CEO makes or exceeds their goals, they’ll often get some extra stock or cash. When they don’t, those numbers drop. And when they miss badly, even their base pay can get cut. That’s usually a pretty good guide to the board’s sentiment.
A board member speaks publicly
This is the final straw — the sign that there’s about to be a change and that you should plan accordingly. The board, in the end, makes the actual decision. Anonymous grumblings and rumours are one thing, but public criticism signals that things have come to a head.
It was pretty much over for Ron Johnson once Bill Ackman, a major JCP shareholder, a board member, and Johnson’s most prominent supporter, publicly commented on his underperformance.
Ackman spoke on a Friday, and Johnson was out on Monday.
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