Back to the Future – The Comeback of the Old Boss

Steve Jobs, Howard Schultz, Charles Schwab, A.G. Lafley, Narayana Murthy, Micheal Dell, Kenneth Lay, Jerry Yang & Paul Allaire – The Comeback Bosses

And to spice it up – Jose Mourinho, Nawaz Sharif & Indira Gandhi

Back to the Future, it is, in the corporate world. Both Procter & Gamble & J.C. Penney replaced their sitting CEOs with his predecessor. Strangely, this back-to-the-future approach had to happen. Whilst the boards may speak of it as a step in the right direction and make nothing out of this brouhaha, this kind of succession isn’t common. Closer home, Narayana Murthy was back at the helm at Infosys albeit in an exalted manner as Executive Chairman.

No matter what the board opines it suggests a few issues –

a) Poor evaluation of the present CEO

b) Poor succession planning

c) Desperation

d) Lack of time to look for a new CEO

 On the flip side what the board gets is

a) A known person with successes to boot

b) Understanding of his skills, strengths & weaknesses

c) Time – time to look for another CEO either to groom internally or an outside hire

It is not to say that it is entirely wrong to get the earlier boss back. Howard Schultz replaced his chosen successor Jim Donald at Starbucks and it worked. It was not the same set of circumstances though, which brought Steve Jobs back to Apple but that worked too and how! However, both were founders of the companies and in a sense, it was easier. The same thing can be said about Narayana Murthy but A.G Lafley and Myron Ullman at P&G and JCP respectively are not.

What it does show is that generally, boards prefer an insider. A majority of the organizations prefer people already ‘in’. In the 2012 Chief Executive Study, called “Time for New CEOs,” conducted by Booz & Company to study trends in successions in large public companies, it was found that 71% of incoming CEOs that year were insiders, and 25% had worked at the same company for their whole career.

Insiders know –

a) The culture of the organisation

b) Its people

c) The capabilities

d) Existing & potential weaknesses

e) Markets

f) Challenges

g) Competition and competitive pressures.

This would give them a leg up and can hit the road faster. Insiders are said to have generated higher total shareholder returns over their tenures.

The same applies to returning bosses. They practically know most aspects and have a larger understanding of both the internal and external conditions of the organization well enough to act swiftly. What also separates them from the promoted CEO is that the challenges of being the CEO are different from being the second in command. There is someone else to take the rap or take the call when you are the second in command. As an actual CEO, the scope is very different & it is far more taxing. This explains why Bob Mcdonald and Ron Johnson who never had CEO experience had to quit. What is more important however is the fact that comeback CEOs have a decent track record of having run their companies earlier (Ullman can be excused as he had managed to show some profits earlier, at least better than Ron Johnson). It is expected that they have not missed much in their absence from the playing field. Their absence from the day-to-day operations can be viewed as an advantage – they would not be responsible for the current mess!

Crudely put, calling back a boss is like calling back a contractor who was anyway supposed to do the job correctly in the first instance. Only when you are pushed to the wall will you do something like this. Hence, there are causes for concern –

a) These comeback bosses would not come back if the company was in a mess or there was an impending mess

b) There is a possibility that the mess was created by the comeback CEOs and at least they are partly responsible because they got in the wrong CEO to replace them

c) It is likely that the strategies that the comeback CEOs had thought of was not workable in the long term and the existing CEO was following the strategy set by his predecessor (and took the rap for it as well).

 d) All comeback bosses left for a reason, whatever it is. Can be retirement, can be another job. There is no guarantee that they will have the same enthusiasm/ energy in the sequel

Rüdiger Fahlenbrach in his study “The Market for Comeback CEOs” 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. This is surprisingly a high percentage!

It was also inferred that “the decision to rehire former CEOs is related to the past performance of both the former and current CEOs. Former CEOs are more likely to be rehired if they had a high stock market performance during their first tenure and if their replacement did particularly poorly. Organizations also are more likely to rehire their former CEOs the larger is the percentage of total institutional ownership and the more intangible are the firm’s assets. The probability of a firm rehiring a former CEO is positively related to the founder and chairman status of the CEO and his share ownership.’

Perhaps the most important category of comeback bosses consists of founder-CEOs who return to try to fix the companies they created – Steve Jobs at Apple, Howard Schultz at Starbucks, Michael Dell at Dell & Charles Schwab at the broking firm named after him. In all these cases their successors have failed, and they had to step right in again. Narayana Murthy perhaps is following a slightly more circuitous route by letting the CEO stay but becoming the Super CEO (Executive Chairman)

Many of the comeback CEOs have done exceedingly well –

a) Steve Jobs changed the way Apple was looked at

b) Charles Schwab reoriented the business and transformed Charles Schwab into a full-service money manager

c) Howard Schultz brought back the romance of coffee houses and the glory days of Starbucks.

But on the flip side, there are many failures too

a) Jerry Yang at Yahoo was a disaster

b) Micheal Dell has managed to keep Dell afloat but it has not been viewed by many as a success

c) Kenneth Lay’s return ended in the Enron bankruptcy

d) Paul Allaire at Xerox was a flop

The burden of great expectations will be on Lafley, Ullman and Murthy. I am sure they are aware that they are expected to succeed and succeed exceedingly well. The same people (shareholders & board) who brought them will be baying for their blood if they do not meet the expectations. If they fail they be accused of hubris. However, we need to admire these gentlemen. They could have sat back, and said: “When I was in…….things were better”. It takes a lot of courage and fortitude to take up such a demanding assignment.