When news of Steve Jobs's passing was released on Oct. 5, 2011, Apple Inc. stock immediately dropped over 5%. There had been absolutely no change in the business fundamentals of the company. Apple products were still in high demand and cash on hand exceeded even the U.S. Treasury's holdings. Somehow, Job's death had greatly weakened confidence in the firm's ability to create shareholder value. Furthermore, Tim Cook was by all accounts a perfectly capable successor, having served for some time as Apple's Chief Operating Officer ( COO ). What happened?
The answer is simple: Steve Jobs had become an integral part of the Apple brand. An effective Chief Executive Officer (CEO) can mean more to a company than simply fulfilling his or her positional responsibilities. Corporations are constantly on the hunt for leaders who can influence their followers to achieve shared goals. While the thought process behind a hiring and firing decision of this magnitude is normally multi-faceted, here are some general reasons why companies choose to hire new CEOs.
The most basic reason for replacing a CEO is a functional shortcoming of the incumbent officer. While CEOs are supposed to leverage their visions to impact the overarching strategy of the business, they must also fulfill their basic responsibilities. These responsibilities vary from one company to another, but can be generalized as ensuring both the short-term and long-term success of the company. Failure to meet these goals often results in early termination.
For example, take former Hewlett-Packard (HP) CEO, Leo Apotheker. Apotheker served as CEO with HP from September 2010 to September 2011; during his tenure, HP stock plummeted from approximately $40 a share to below $25, more than a 40% slide. Apotheker was responsible for a chain of gaffes including encouraging a move away from the PC business, HP's biggest revenue driver, as well as abandoning the company's tablet development. Critics maintain that Apotheker's background with software firm SAP did not adequately prepare him to lead a Fortune 500 company. Today, current CEO Meg Whitman seeks to avoid the pitfalls that did Apotheker in.
A CEO replacement decision may also be based on an incumbent CEO ignoring or not understanding the company's ethos or underlying character. Truly great CEOs work to ensure that proposed change is complimentary to the company's culture. Accomplishing this, however, implies a thorough understanding of the company's philosophy, which is easier said than done.
Look no further than the hiring of Marissa Mayer by Yahoo! - the computer services company sought to change the anemic, lifeless culture that resulted in high turnover and low growth with the hiring of the former Google executive. Yahoo! rapidly cycled through four CEOs from June 2007 to July 2012, each failing for reasons varying from public profanity to lying on resumes, with massive layoffs being the only common denominator. With Mayer, Yahoo! seeks to rejuvenate the company's culture and image.
A Vision Void
Some have it, while others don't. Vision is an intangible skill set that cannot be readily taught, if at all. Once it is determined where the greener pastures lie, visionaries are adept at aligning and empowering their followers to get there. On the flip side, the goal a CEO strives to lead his or her company toward must be worth attaining in the first place.
Once a financial services behemoth, Merrill Lynch lost billions of dollars in late 2007 and was ultimately sold to Bank of America. The company's CEO, Stan O'Neal, had "pil[ed] up Merrill's balance sheet with explosive mortgage debt and buil[t] up a huge subprime mortgage origination machine at the peak of the market." When the subprime m ortgage and collateralized-debt obligation (CDO) markets failed, Merrill Lynch went down with it.
Within the traditional corporate structuring, the board of directors is responsible for the appointment and continued review of the CEO's performance. For the most part, the CEO and board are able to collaborate and share a positive working relationship. Sometimes, however, not so much. Just earlier this year, CEO Vikram Pandit of Citigroup stepped down from his position following an announcement of the firm's third quarter earnings. Why? Allegedly Chairman of the Board Michael O'Neill had been pressuring the board to fire Pandit from day one.
The Bottom Line
Companies fire and hire new CEOs routinely. The position of CEO is arguably the hardest in all of business. While the details of each case are variable, CEOs must find ways to manage the expectations of their boards, investors, employees and customers, in order to be successful.
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