The Wisdom Of Panic: Firing CEOs When The Chips Are On The Line

The Wall Street Journal has made a great deal of the fact that six big company CEOs have been sacked in the last eight days. Chief executives are fired all the time, so the statistical analysis behind the idea that this is something special may be bogus, but the point is taken.

In normal economic periods, CEOs are forced out for ruining earnings that should be robust or doing something like going to a strip club and putting it on the company American Express as one particularly bold fellow from telecom company Savvis did two years ago.

During a recession, stockholders and boards are faced with share prices that can move down 80% or 90% in a year. In places like Citigroup (C), the fault many rest inside the company. At operations like book retailer Borders Group (BGP) no one is going to fix a problem which is caused by a fundamental change in consumer behavior. All the head of Borders can do it close stores and cut people.That requires almost no skill, just a person with a heart made of coal.

Replacing a CEO, even if he has modest flaws, during a recession is almost certainly a poor idea  A new man needs six months to meet everyone, find out how to spell the company’s name, and get a handle on why things are not going right. Most recruiters, in rare moments of honesty, would admit that many new CEOs don’t work out, no matter how thorough the vetting process was. It is not unlike drafting a professional football player. Sometimes men who look good on paper can’t make it at the next level.

Saving or preserving a company in a vicious downturn does requires some experience and experience that is entirely related to an industry and even an individual company. Knowing what buttons to push is an underestimated skill.

Recently, mutual fund company Alliance Berstein (AB) fired its CEO, a man with forty years at the firm. It brought in a manager from Merrill Lynch who was probably going to lose his job due to the broker merging with Bank of America (BAC).

Alliance Bernstein’s performance had been awful, but that was because it shared a problem which had run through the industry. People holding funds where taking their money out. The value of all assets were being undermined by a falling market.

Most CEOs are not sympathetic characters, but most have the value of experience. When the world starts to cave in, that is not altogether irrelevant.

Douglas A. McIntyre