Carol Bartz was unceremoniously thrown out of the executive suite at Yahoo (YHOO) last week. Given the firm's struggles during the last few years, no one was exactly blown away by the news. Bartz's ouster is the latest in a line of CEO changes at the top of a number of high-profile firms during the last few years from Bank of America (BAC) to Hewlett-Packard (HPQ).
Although the motivation behind replacing CEOs was different in each of these cases, there was some hope that a change at the top would help effect positive changes across the organisation or at the very least not fundamentally throw the business off track. However, there are many examples of how replacing a CEO can be incredibly disruptive and ends up being no panacea for a firm's ills.
Yahoo's board may have made the right call to remove Bartz, but investors shouldn't get too excited about the prospects of what her successor can do. Recent history has shown that management changes often result in fewer benefits than advertised.
Bank of America was riding high before the financial crisis brought it tumbling back to earth. Former CEO Ken Lewis had masterfully stitched together an impressive number of acquisitions and built the retail bank into the United States' largest. But what were initially seen as highly lucrative white-knight buys of Countrywide and Merrill Lynch quickly turned sour when the full extent of the mortgage crisis became known. Between pressure from the board, shareholders, and regulators Lewis announced he was stepping down by the end of 2009. After a bit of a search and a look at some internal and external candidates, the firm settled on insider Brian Moynihan who had previously run the consumer business and the investment bank. The hope was that Moynihan would be able to lead the bank through the recovery, dispose of the rest of the firm's toxic assets, and bring the firm back to its core earnings power.
That hasn't exactly worked out so far. As the other major banks have mostly put the crisis behind them, Bank of America is still struggling to convince investors it is through the woods. The question marks surrounding the potential legal liabilities from mortgage securities issues have led to lacklustre share performance. Even votes of confidence from Fairholme's Bruce Berkowitz and Berkshire Hathaway's Warren Buffett haven't convinced the market that Moynihan is the guy to turn the bank around.
This is not to say the issues are 100% his fault. Moynihan can't go back in time and stop the Countrywide deal and magically erase all of the potential liabilities that come along with it. And critically, turning around a massive organisation like Bank of America isn't something that can be done overnight. There are so many moving parts at a behemoth like BofA, and so much risk to making sudden changes, that even the most adept manager wouldn't be able to turn it on a dime after the financial crisis. There is only so much he can do.
The bank recently announced that it is shuffling more of its top management, replacing two executives in charge of global wealth and investment banking and consumer and small business banking with two new co-COOs. And as our Bank of America analyst Jim Sinegal pointed out, this is unlikely to address any of the major issues the firm is facing right now. There might be some new names in the executive suite, but there are no real changes to the firm's outlook and prospects.
The Fundamentals Were There
HP also hasn't seen many positive changes when it made a move at the top. The HP board pushed Mark Hurd out in August 2010 after allegations emerged that he had abused his expense account along with a claim of sexual harassment. The board eventually cleared him of the more serious claims but determined that he had not lived up to their standards, and Hurd was forced to resign. By most accounts, Hurd was doing a good job at the helm. His ouster was related more to internal politics than performance.
Former SAP (SAP) chief Leo Apotheker was named to replace Hurd a month later. The board hoped that Apotheker would be able to keep Hurd's winning streak going. However, his performance during the last year has hardly been inspiring, shares are down more than 38% during the last 12 months.
Unlike Bank of America with its high legacy costs, HP is more nimble and it's therefore been easier to shift the course of business. Additionally, Apotheker has clearly been making his mark. He announced that the firm is considering spinning off its PC hardware business, killing its nascent tablet and handset line, and focusing on services. Clearly, Apotheker is more comfortable with the enterprise space. However, these moves are controversial at best, and shares sold off heavily on the news. Instead of following in Hurd's footsteps, Apotheker is taking the firm in a radical new direction. Changing strategy is of course the CEO's prerogative, but shareholders who were happy with the direction Hurd was taking the business are likely fuming now.
Bank of America's and HP's former CEOs were thrown out for very different reasons, but both of their successors have struggled in their new roles to instill confidence. And it seems likely that Yahoo is headed for that same struggle. The firm faces a potent combination of legacy problems and culture problems that seem reminiscent of some of the issues facing BofA and HP.
What's Expected?
As our analyst Rick Summer discusses, the new CEO will have to turn around the core search and display advertising business, and this isn't a matter of making a few small changes. Competing against Google (GOOG) is a formidable task and selling the value of the firm to advertisers isn't going to suddenly become easier with a few new executives. If the core business keeps declining, there is only so much a good manager can do to stop the bleeding. Even if this is the first step in a sale of the company, it is unlikely that any sale would approach Microsoft's (MSFT) $31-per-share offer in 2008, and shareholders might end up less than thrilled. And more deeply, Yahoo's board seems unable to decide exactly what they want the company to be. The sudden firing of Bartz over the phone doesn't bode well for the group's ability to craft a long-term strategic plan.
Now of course, not every new CEO has these struggles. Often management shuffles really are the catalyst for change. Even just looking at HP, the firm thrived under Hurd after he replaced Carly Fiorina. And orderly transitions (look at Tim Cook taking the reins at Apple (AAPL)) often occur without a blip. But generally speaking, hoping that a new management team is going to work magic is just that: hope.
Bearish markets editor Bearemy Glaser is the worry-prone alter-ego of Morningstar markets editor Jeremy Glaser. Each week, Bearemy will share what's topping his list of concerns and invites you to add your own in the comments section below.
