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2014-12-17 10:58:43
Sydney Finkelstein
The worst CEOs of 2014
The toughest thing for any business is to stay on top.
Past success at any stage is never a guarantee of continuing success. In fact, my research has shown time and again that great success is almost always a warning sign for failure.
And so it is with the worst CEOs of 2014. In virtually each instance, the seeds of failure were sown in earlier success. These five chief executives were celebrated for their genius at one time, but all have fallen, sometimes in spectacular ways.
Before revealing this year s list, a little background. For the last 15 years I ve been studying great, and far-from-great, leaders. My book, Why Smart Executives Fail, was the culmination of an extensive research process that uncovered the most common drivers of failure in organisational life. While the specifics often varied, in the end it was always about human nature.
For the last five years I ve been publishing my annual list of the worst CEOs of the year (and starting last year an accompanying list of the best CEOs of the year). My research team analyses hundreds of companies to identify the very few that not only reported exceptionally poor financial results, but were also led by a CEO whose actions, or inactions, directly affected those results.
To make sure we have it right, we compare our worst CEO picks to other leaders in the same industry, to gauge relative performance. And while my list is a 2014 list, inevitably some of the decisions and actions of CEOs that earned them their spot can be attributed to previous years, as well.
Number 5: Dick Costolo, Twitter
It pains me to include the CEO of Twitter on my worst list, as I m a big fan of the app (or is it a website, or maybe a digital newspaper?).
But the numbers don t lie. In contrast to Facebook, Twitter has grown more slowly, more fitfully, and with more question marks about the basic business model. Shares have dropped this year by 42%. Facebook, in comparison, popped 42%-plus over the same period. There are plenty of metrics to evaluate Twitter, but the best is monthly active users (MAU), and Twitter s rate of growth has slowed despite having 284 million MAU (Facebook has 1.4 billion).
Costolo is far from a disaster as CEO. In fact, he has a big-time track record with start-ups. But when the upside (and market valuation) is as big as it is for Twitter, you ve got to have a CEO who can fulfil that potential.
Part of the problem is the revolving door at the top. Numerous senior executives have arrived with fanfare, only to leave after a surprisingly short tenure. The strategy Costolo uses keeps changing. That s common for start-ups looking to pivot to a winning formula, but tough to stomach in a company that went public on 15 November, 2013, with a first day closing valuation of $31bn (versus $23.2bn at the end of last week).
Again, Facebook CEO Mark Zuckerberg provides the contrast, proving adept at change (to mobile after a slow start), and building world-class team (eg, Sheryl Sandberg). When the core product has this potential, and it s not being reached, blame rightly goes to the CEO.
The red flags are out in force. Big investors have been questioning Costolo s leadership. PayPal co-founder Peter Thiel, for one, an early investor in Facebook, even called Twitter a horribly mismanaged company . Costolo has also been criticised for selling a big chunk of his shares in November, just one week after going on TV to talk about how confident he was about the strategy and the team.
In 2013 Dick Costolo was named CEO of the Year at the tech industry awards event organised by the Silicon Valley media group TechCrunch. Perhaps that s as good an example of past success being a warning sign for failure as you can find.
Number 4: Eddie Lampert, Sears Holdings
Eddie Lampert is an expert hedge fund investor. Somewhere along the way he decided he was also an expert CEO, acquiring both Sears and Kmart and embarking on a seemingly never-ending turnaround strategy of the iconic old-line retailers, whose time have most assuredly passed. One thing we can credit Lampert with is persistence, as his failed strategy, arrogant leadership and free-falling stock price earned him a spot on my 2013 worst CEOs list.
And now he s back for a second helping.
This year Sears has continued to book half-billion-dollar quarterly losses ($548m in the quarter ending 1 November). That makes nine straight quarters of red ink. Sales are down, continuing a streak that goes back seven consecutive years. Suppliers who want to sell to Sears can no longer buy top insurance coverage for non-payment, leading to onerous credit terms. That is inline with Moody s rating of Sears debt as CC ( speculative ).
The careers website Glassdoor reports Lampert has the CEO lowest approval rating among employees of any company in their database (18%). And the company s stock is down in 2014 by 34%. That s quite a feat on top of the 70% decline from its peak in 2007. In contrast, retailer Macy s is up 17%, and even discount retailer Kohl s is flat.
One of the most fascinating parts of this story is how Lampert is positioning himself for an apparent exit. His hedge fund loaned Sears a desperately needed $400m in September, taking as collateral 25 stores, implying a valuation of $16m a store. Leaving aside the fact that Sears has been selling stores at $20m to $50m, the deal is an apparent conflict of interest because Lampert has bought himself a hedge to lessen the blow from a Sears default at terms potentially that are more favourable to him than to other shareholders.
Of course it hardly makes sense for Lampert to root for a default, since his investment in Sears is greater than $400m, but the terms of this deal do raise questions.
Great investors do not necessarily make great CEOs.
Number 3: Philip Clarke, Tesco (with honourable mention to his predecessor, Terry Leahy)
Tesco is another old-line powerhouse retailer that may have wished 2014 had never happened. And while CEO Philip Clarke was responsible for what can only be called a disastrous year, some attention should be paid to the particularly bad hand he inherited from his predecessor, long-time CEO Terry Leahy.
Here s the Tesco shopping list: Aggressive international expansion to ensure out-sized risk to strategy; casual response to cut-throat discount competitors from Germany; management culture designed not to rock the boat, complete with a scolding CEO, surrounded by yes-men.
Each element contributed to the mess Tesco is now in. Leahy s US venture of Fresh & Easy was anything but, costing the company 1.7bn ($2.7bn), in part because Clarke took his time closing down a business that never got going. The grocery discounters Aldi and Lidl keep eating market share while Clarke spearheads the classic stuck-in-the-middle strategy, with prices not quite low enough and a brand not quite strong enough. Add to that a pressure cooker environment that could never produce and an ongoing investigation into alleged overstating of profits.
Sales and profits have been tanking throughout most of Clarke s tenure, yet he seemed to be almost surprised by the depth of the problem, forced to issue profit warnings on three different occasions.
Even legendary investor Warren Buffet called his investment in Tesco, originally 5% of equity, a huge mistake .
Clarke only made it to 21 July before stepping down, although he stayed on until 1 September. It was perhaps his biggest value creation move of the year. Shares were initially up 500m ($781.8m) on the news, although that was not enough to make up for a 31% decrease in share price up to that point in the year. It will be up to outsider Dave Lewis to right the ship.
Number 2: Dov Charney, American Apparel
There are plenty of examples of company founders failing once a company has been established. But there are few better examples of the perils of doing so than Dov Charney.
Charney built American Apparel into a thriving, and profitable business only to see it descend in recent years to become a scandal-plagued company that has lost money for four years straight. The stock price is down 80% in five years, including 53% in 2014. Same-stores sales are down. Debt is up, some coming with a 15% interest rate. Call it the Charney risk premium.
It's not just the numbers. Charney had no chief financial officer at the company until he was required to appoint one as part of American Apparel's IPO in 2007. Key jobs such as chief operating officer, chief technology officer and even official designers have gone missing. He pushed out other top executives, including the general counsel in May of this year, and the seasoned fashion retail executive Marty Staff in 2011 (after only six months on the job).
Entrepreneurs who never give up any control, or fail to bring in professional managers, tend to blow up at some point. Hubris never wins.
Charney practically wrote the book on poor judgment, much of it just emerging due to long overdue board investigations that began in 2014.
Among the allegations the board has levelled against Charney:
To top it off, an arbitrator found Charney guilty of defamation for failing to stop the creation of a fake blog and the publication of naked photographs of a former employee who had sued him for sexual harassment.
For all this, Charney was fired by the board on 18 June (feted by the market with a 20% increase in share price), only to be reinstated as a "consultant" by a hedge fund that swooped in to buy up shares on the cheap. And on Tuesday the board announced that Charney will lose his consultancy gig when new CEO Paula Schneider takes over on 5 January.
A CEO should be the strategic, cultural and moral leader of an organisation. While a company can flounder on for a bit when it's helmed by someone who struggles with some, or all of these qualities, at some point they become too much. Almost like a fault line in a geological zone, a company whose foundation is shaky - or not firmly ensconced to core values - falls down.
In 2014, American Apparel and Dov Charney represent the perfect example of a fall from grace.
Number 1: Ricardo Espirito Santo Silva Salgado, Banco Espirito Santo (BES)
The worst CEO of the year goes to the head of the Salgado family of Portugal, the kingpin of an interlocking and complex set of entities that controlled the second-biggest bank in Portugal and brought it to bankruptcy.
The bank s first half loss this year was 3.6bn euros ($4.5bn), forcing the Portuguese government to inject 4.9bn euros ($6.1bn) into the bank as part of a restructuring that leaves Salgado, and many investors that went along with him, out in the cold.
BES was partially owned by Espirito Santo International (ESI), a family-controlled corporation consisting of dozens of nonfinancial businesses that relied on bank profits for start-up cash and ongoing working capital. When the financial crisis hit, the bank s ability to generate cash slowed, forcing Salgado to institute a variety of complex lending arrangements to prop up the empire.
Debt at Rioforte, the privately-held company that controls family interests, ballooned to 2.9bn euros ($3.6bn). Its unaudited net assets as of 30 June were about 173.2m euros, according to reports. Rioforte filed for bankruptcy in October.
Putting 250 family members into management and leadership jobs might make for grand family reunions, but it can hardly be justified on the basis of sound managerial practice and judgment. Salgado, and some other family members, lived like kings in large estates, unhindered by even the most rudimentary oversight of the bank.
There are multiple ongoing investigations that are pinning the blame squarely on Salgado, who was forced out on 14 July. The question of fraud has been raised. Salgado, testifying at a parliamentary hearing earlier in December, blamed the Bank of Portugal for forcing BES into bankruptcy, asserting that the family hadn t appropriated a single penny .
It may be that there was no intent to defraud, and that Salgado, when faced with bad investments in a tough economy, was trying to keep it all afloat. However, the fact that ESI expanded so aggressively, relying on leverage so extensively, in a challenging economic environment, must be seen for what it is: bad management. These high-risk strategies could only work if all sorts of things went right, and it s the job of a CEO to use sound judgment in managing the enterprise. That was not the case here.
The record indicates a series of bad judgment calls:
In testimony to parliament earlier in December, Salgado blamed an accountant for hiding liabilities, but the CEO of Semapa, a company to which ESI was trying to sell bonds, told the same commission that "nothing was ever done without Salgado knowing".
In the end, and in a remarkably similar fashion to the worst CEO of 2013, Eike Batista of Brazil, this remains a cautionary tale of the incredible power of hubris to destroy empires, and the reputations of those that created them.