24/7 Wall St. CEOs Who Need to be Fired: Nine for 2010

Public companies dismiss CEOs all the time. The firings can be due to incompetence, malfeasance, or tensions with boards of directors or founders. 24/7 Wall St. has chosen nine sitting CEOs who should be let go by their boards.

All the CEOs are on this list for simple reasons. The first is that many have presided over ethical or legal lapses. This is certainly an issue at Goldman Sachs, Dell, and Moody’s. It is easy for observers to say that the chief executive of a large firm cannot be responsible for every action of every employee. But when the trouble is repeated and widespread, it is senior management that must be blamed for refusing to set a strong moral tone.

Some candidates are on this list is because they have made strategic decisions that have cost their companies dearly. Sprint-Nextel has decided  to adopt a 4G format that is different from the one that AT&T and Verizon Wireless will use. In coming to the market first, it hopes to steal subscribers from its two larger rivals. Unfortunately for Sprint, both AT&T and Verizon have very strong products and competitive pricing to keep their customers where they are. Sprint probably painted itself into a box – a box in which its technology is unsustainably in the minority.

The last reason that a CEO may have been chosen is a simple one: the exceedingly poor management of a large and previously highly successful business. The best example of this is Boeing. It has been one of the world’s premier manufacturing companies. The failure to deliver its flagship product on time has hurt the firm, as it has repeatedly put off the launch of the 787 Dreamliner.

What follows is a list of the CEOs and the case against them remaining in their current positions. Each of these companies would be much better off with a new leader – customers, shareholders, and employees should expect that they will get them.

1. Wal-Mart Stores Inc.

* CEO: Michael Duke

* When He Started: February, 2009

Michael Duke became CEO of Wal-Mart on February 1, 2009. Since then, the company’s stock is up 5%. The shares of archrivals Target (NYSE: TGT) and Costco (NASDAQ), are up 65% and 22% respectively. Worse, even industry whipping boy Sears Holdings (NASDAQ: SHLD) shares are up 53% during the same time frame.

Duke has far more resources than his competitors. Walmart has sales of more than $400 billion and 2.1 million workers. The company operates 803 discount stores, 2,747 supercenters, 158 neighborhood markets, and 596 Sam’s Clubs in the United States alone. The company also has a significant presence in China, Mexico, and Brazil.

Walmart’s opportunities to expand overseas remain significant, though many of the problems that it faces existed before Duke’s appointment. Walmart’s attempts to enter South Korea and Germany were failures, and it has struggled for years in Japan. The world’s largest retailer is only now starting to move into India. In this regard, Duke has failed to correct the sins of his predecessors and has perpetuated many of them.

However, the most damning part of Walmart’s performance in the last year-and-a-half has been its inability to increase its business in the US. On March 19, the company reported its fourth quarter in a row of disappointing same store sales in the US. The Wall Street Journal reported that “Wal-Mart’s forecast was considerably gloomier than recent guidance from other retailers such as J.C. Penney Co., Macy’s Inc. and Kohl’s Corp., which this month reported that customers had regained confidence and slowly resumed discretionary spending.”

Duke cannot be blamed for the recession, but he can be blamed for Walmart’s inability to exit the downturn as quickly as its rivals. It has resorted to aggressive discounting, but that does not appear to have done much to help its momentum.

Walmart’s activity online also represents a notable failure. According to comScore, Walmart websites had 35.5 million visitors in the US in May, making it the second largest e-commerce site. Amazon.com, the number one operation, had 78 million visitors and brings $30 billion a year in revenue. Despite its apparent success online, Walmart.com represents only a tiny fraction of Walmart’s sales. Given the firm’s resources and brand, its share of the e-commerce market should be much greater and should represent a larger percentage of its revenue.

The biggest strike against Duke is that he has done so little to change the company.  The stores have not evolved to address the company’s shortcomings or the changing face of the market. As evidence, its online presence has not improved and the presence of the company in parts of the country, especially urban areas has remained largely static.

It is easy to say that there has been resistance to expansion. However, good management is good because it can overcome those hurdles. Walmart appears fated to have two or three more years like the last three. With the company’s resources, that is not even close to acceptable.

2. Sears Holdings Corporation

* CEO: W. Bruce Johnson

* When He Started: February, 2008

Bruce Johnson has been the interim CEO of Sears Holdings for more than two years. There are several reasons that the board has not given him a permanent position and it is unlikely to do so in the future.

Sears’ s restructuring efforts, which have gone on since 2005, are stalled. The company has been slow to close money-losing stores and to distinguish either of its brands – K-Mart or Sears. The company said in May that same store sales in the quarter that had just ended were up 3.2% at K-Mart and .3% at Sears. The market’s reaction has been to keep the stock low.

Johnson has not improved the position of shareholders. Admittedly, Sears’s shares have performed about as well as the DJIA in the last two years – down about 5%. However, the stock is off 60% since Sears Holdings was created five years ago. Sears Holdings had sales of $50.7 billion in the fiscal year that ended in February 2008. That number fell to $46.7 billion in the 2009 fiscal and $44 billion in the most recent year.

Further, net income two years ago was $826 million. It was $235 million in the year that just ended. As a contrast, Costco’s (NASDAQ:CSCO)  revenue has risen from $64.4 billion two years ago to $71.4 billion in the year just ended. And unlike Sears’s continuous slide, Costco’s net income has been flat.

Johnson has also failed to improve Sears brand equity. In the most recent Interbrand study of the 100 best brands, Costco ranked No.14 with a $22 billion valuation. Sears was not even on the list.

Sears Holdings is highly leveraged with total debt (adjusted for debt-like commitments) at 4.6 times earnings before interest, taxes, depreciation, amortization and rent expense. And, as Morningstar pointed out recently, “Profit margins remain razor-thin compared to peers.”

Sears needs to find a highly regarded retail executive to step in and operate the company.

3. Toyota Motor Company

* CEO: Akio Toyoda

* When He Started: June, 2009

Akio Toyoda, the CEO of the car company founded by his grandfather, was put into the CEO’s job in June 2009.  The expectation was that he would change the sleepy culture that has characterized its management for several years. For the fiscal year that ended March 2009, Toyota had lost $1.7 billion. The global car market had reached a multi-decade low.

Toyoda was promoted because the company was experiencing quality problems with many of its models. Analysts blamed this on the firm’s expansion, which had moved at a rapid pace around the world for 30 years. Toyoda did not address the quality problem early in his tenure. He did not make any visible commitment to engineering or product management resources to decrease flaws among the company’s products. Although those issues were addressed, it was only after the largest series of vehicle recalls in the history of the auto industry. Toyota’s rankings in the recent J.D. Power & Associates’ annual study of vehicle appeal. were second from the bottom. The car company had held one of the top spots for years.

Documents show that Toyota was not only slow to disclose problems with its cars to government regulators. In fact, the company was reluctant to divulge some issues at all. This moral relativism, putting profits ahead of product safety, will be Toyoda’s legacy.

The recalls of vehicles worldwide for accelerator and brake problems and subsequent smaller recalls as recent as last week have completely undermined Toyoda’s ability to run the company.

4. Boeing Co.

* CEO: W. James McNerney, Jr.

* When He Started: July, 2005

In 2005, W. James McNerney, Jr was brought into Boeing, one of America’s greatest manufacturers, to take the company into the 21st Century. McNerney had been considered one of the premier candidates to run a large company since he was a candidate to take the chief executive’s job at GE. Prior to his appointment at Boeing, he had been CEO of 3M.

Boeing’s most important initiative of the last decade, the initiative on which the company’s future was to be based, is the 787 Dreamliner. Work began on the project at about the same time that McNerney joined the company. Troubles with product sourcing and the assembly and manufacturing process caused Boeing to miss the August 2007 launch of the aircraft. Another delay was announced in October 2007 due to supplier and fastener problems. Yet another delay was announced in January 2008. There was another in April 2009, partly due to labor problems. The launch was delayed two more times, and now, nearly three years later, the 787 has yet to be delivered to customers. The company disclosed this week that the release date of the plane may be pushed back again to early 2011.

The Dreamliner project was one of the largest design and manufacturing programs by any industrial company in the world over the last ten years. It has been an unmitigated disaster.

5. Dell Inc.

* CEO: Michael Dell

* When He Started: January, 2007

Dell began to have significant accounting and product quality issues about five years ago. Its shares have plunged 65% since then. The stock in rival Hewlett-Packard (NASDAQ:HPQ)  is up 80% during the same period. The company’s board of directors made a major mistake when it fired Kevin Rollins in January 2007 and brought back Michael Dell. It should have reached outside the company. No matter what role Rollins held, Dell has been the de facto chief of the company since its founding in 1984.

Since Michael Dell returned, his company has lost its leading position in the PC industry. Worse still, it has been through a wrenching series of scandals that include accounting troubles, charges of fraud, and strong evidence that the PC firm knowingly shipped millions of flawed computers. Dell has obviously created a culture in which the customer and shareholders take a back seat to management.

In August 2007, Dell said it would restate financial results for fiscal years 2003 through 2006 and for the first quarter of 2007. The move was the result of an investigation that uncovered internal efforts to manipulate and inflate company performance. In June 2010, as the result of the federal investigation of accounting fraud, the company said it would take a $100 million charge on its first quarter 2011 earnings.  Dell’s settlement with the SEC includes the liability payment and a civil injunctive action. Last month, in yet another case, court documents in a suit against Dell about product flaws revealed that company employees were aware that the about 11.8 million affected computers might break or cause fires, but were instructed to downplay the problems when talking to customers, according to The New York Times.

Dell may never recover from this series of mistakes and its brand is permanently tainted.

6. Moody’s Corp.

* CEO: Raymond W. McDaniel

* When He Started: April, 2005

Moody’s (MCO) has been one of the premier ratings companies in the US since it was founded in 1909. That reputation has been virtually destroyed during the period since Ray McDaniel took over as CEO in April 2005. Since then, Moody’s shares are down 55%.

Moody’s, Standard & Poor’s, and Fitch Ratings, Inc. all played a large part in the housing bubble by assigning Aaa ratings (the highest level) to securities that included subprime loans. As Pro Publica has pointed out “the ratings turned out to be faulty, which some employees knew at the time, and the credit default swaps ended up actually fueling the crisis.” Many experts say that if the securities had carried appropriate junk bond ratings the credit crisis might not have happened at all, or if it had, the results would have been substantially cushioned.

The case against Moody’s which is still pending with the SEC was strengthened when Eric Kolchinsky a former company employee ,said the firm at times gave high ratings for a complex debt securities in January 2009, knowing that it was planning to downgrade assets that backed the securities. The securities were indeed reviewed for downgrades later.

The Congress and SEC inquiries about mortgage instruments are not the company’s only problem. Moody’s recently disclosed that it might face a SEC administrative charge that it misled regulators when it applied for its license in 2007.

There are also a number of suits pending against Moody’s by companies that used its mortgage-backed securities ratings to buy these debt instruments.

McDaniel, like all CEOs, is responsible for the ethical and legal behavior of all his employees. There have been severe lapses in both areas since he took over, and they have been repeated. Moody’s can’t salvage its reputation without a new chief.

7. Sprint Nextel Corp.

* CEO: Daniel R. Hesse

* When He Started: December, 2007

Dan Hesse joined Sprint-Nextel Corp. (NYSE: S) December 18, 2007.  Since that time, the company’s stock price is down 65%.  Meanwhile, AT&T’s share price is off less than 30%.

The single biggest problem that Hesse has had to deal with is customer service. While the company claims that it has made improvements, certain large national studies, like the MSN Money Customer Service Survey, continue to rate among the worst ten for all companies and the only wireless service among them.  This has prevented Sprint from gaining subscribers in a period in which AT&T and Verizon Wireless have picked customers through both acquisition and organic growth.  Sprint’s failure is especially evident over the last year.

There are about 285 million wireless subscribers in the U.S.  Sprint’s current subscriber count is 48.1 million.  Verizon Wireless has 92.8 million customers. AT&T has 87 million.

Sprint has also had trouble with both sales and profits.  Its annual revenue has fallen from $40.1 billion in 2007 to $33.2 billion last year. It had a net loss in each of those years.  Sprint also lost money in the first quarter of this year; a net loss of $865 million on $8.1 billion in revenue. Sprint has gambled almost its entire future on 4G technology called WiMax. This is different from the LTE Technology that will probably be used by AT&T and Verizon Wireless.  While WiMax can increase download speeds as much as ten times faster than the current AT&T and Verizon Networks services, odds are that the customers of the two larger companies will wait for their companies’ upcoming 4G products.

Hesse has made two decisions, neither of which is likely to pay off.  The first is based on the belief that WiMax will be the dominant 4G technology.  The second is that customers from AT&T and Verizon will simply walk away from their current carriers to be the first to have access to a 4G network.  WiMax has launched in 23 markets, and the company plans to have coverage reaching 123 million people by the end of this year.  There is no evidence that wireless consumers are leaving AT&T and Verizon for Sprint in great numbers.

Sprint needs a CEO with M&A and restructuring experience to buy assets that will expand its strategic position in the US wireless industry, or sell off assets that are not at the core of the company’s potential success.

8. BP plc

* CEO: Tony Hayward

* When He Started: May, 2007

The CEO’s job at BP plc (NYSE: BP) may have been the best in the oil industry – up until recently. BP has been the dominant player in offshore drilling, which by most accounts, is where the majority of the world’s future oil reserves will be found and exploited.

Last year BP had profits of $21 billion on $239 billion in revenue, making it one of the largest companies in the world.  Earlier this year, BP’s market capitalization was close to $225 billion.

BP’s future is now as bleak as that of any large country in the world. CEO Anthony Brian “Tony” Hayward took over the top spot on May 1, 2007. To make way for him, the board of directors pushed out Lord John Browne.  Browne left the job to a large extent because of safety issues arising from the company’s pipeline operation in Alaska and an explosion at one of its large Texas refineries that killed 15 people and injured more than a 170.  The irony of this is breathtaking.

Hayward, at the very least, perpetuated a culture at BP that clearly places profits above safety.  On April 20, 2010, the explosion on the company’s Deepwater Horizon oil rig killed 11 people and began a leak which has been estimated as high as 60,000 barrels a day.  Hayward said on May 17th that the gulf spill’s effects would likely be “very, very modest.”

BP has already had to create a $20 billion escrow fund to cover clean up costs and liabilities arising from the spill.  Investors have lost over $100 billion in market capitalization and the company will almost certainly have to sell some of its most prized assets to fund liabilities that could run into the tens of billions of dollars.

Tony Hayward, Mr. Safety, will be remembered as the man on watch when BP’s future was virtually destroyed.

9. Goldman Sachs Group, Inc.

* CEO: Lloyd Blankfein

* When He Started: June, 2005

Lloyd Blankfein became CEO of Goldman Sachs Group, Inc. (NYSE: GS) May 1, 2006.  He earned $53.4 million that year and $54 the year after.  Under Blankfein Goldman produced massive profits and the company’s stock went from a $165 when he became CEO to $234 on October 8, 2007.  During that period, Goldman Sachs was considered the premiere investment bank in the world.

Like the industry, Goldman suffered from the credit crisis in late 2008, and its stock price fell below $55. However, in September 2008 Warren Buffett invested $5 billion in the company, despite the turbulent period, reflecting perception of the bank’s inherent financial strength.  Goldman also took $10 billion in TARP funds, but returned the money to the government in less than a year later.

The most powerful and the only necessary criticism of Blankfein is the abundance of evidence that the company committed a number of unethical acts during the credit crisis.  Recently, the SEC charged Goldman Sachs with fraud in structuring and marketing of certain securities tied to subprime mortgage collateralized debt obligations.  According to the allegations, Goldman failed to disclose to buyers of the securities the role that a major hedge fund played in creating the securities and that the hedge fund had taken a short position against them. Goldman Sachs settled the charges for $550 million, but the SEC is looking at other CDOs sold by Goldman. When it announced the settlement the SEC said “We are looking at deals across a wide variety of products and institutions and that will continue.”

A large number of Goldman Sachs shareholders and some of its customers have demanded that Blankfein step down.  They argue, quite persuasively, that Blankfein perpetuated a culture that focused on profits, putting the interests of the company above the interest of its customers.

The allegations have pushed Goldman’s stock from $185 on April 14 to $141 this week, cutting the company’s market cap by $25 billion. It remains to be seen whether the government will bring additional charges against Goldman and how many customers will flee the firm. It will never be known how many potential customers will opt not to do business with the company at all.

The most blue chip firm on Wall Street for decades is now black.

Jon C Ogg and Douglas A. McIntyre