Chasing Lightning

Deciding Whether to Keep a Stock after its Iconic Leader Departs

By Anthony Rhodes

It is said that genius usually skips a generation. There are rare exceptions to this rule (J.S. and J.C. Bach, immediately comes to mind), but as the emergence of genius is itself an anomalous event, the likelihood of successive anomalies occurring in the same location is mathematically implausible, which points to the general reliability of this statement. Such an unlikelihood also tends to hold true in the corporate world. It is exceptionally rare for one iconic chief executive to be succeeded by another, even though boards like to choose as their replacement an individual who has worked alongside the icon, in the belief that their company has somehow defied these odds, by having two of such persons employed under the same roof, at the exact same time.    

Replacing a legendary leader is not easy to do in any field. Primarily because, the relationships which he or she has amassed over the years (and contributed to so much of his/her success) are not easily transferred to others, and even if they were, aren’t guaranteed to produce the same results as they did for their predecessor. This quandary is placed in focus for this weeks’ topic, as I note the difficulties which corporations face when replacing iconic executives. As investors, we also have to confront this reality, and decide for ourselves if we should abandon these stocks once such leaders no longer occupy the executive suite, or to go against conventional thinking and retain them, in the ambitious hopes that lightning will, in fact, strike twice in the same place.

Ghost In The Room

One reason why this challenge is so difficult to overcome, is simply the pressure placed upon the successor to live up to the performance of the predecessor. Whether it’s applied by fellow executives or self imposed, such expectations can cause the newly appointed to doubt his or her abilities, and to constantly question whether their actions are identical to those which would have been made by the replaced icon. Adjusting to this situation can take years, and has contributed to the failure of many once thought of rising stars. Sadly, by the time those who finally exorcise this ghost are ready to spread their wings and take flight, both their boards and shareholders’ patience has all too often run out, and they themselves are summarily replaced as a result.

Changing Paradigms

A major reason why legendary leaders resign, is the truthful acknowledgement that their time has come to a close, and that the landscape in which they’ve operated (and dominated) is beginning to shift. Be these technical, regulatory, operational changes or others, the energy required to transform the company to better meet these emerging challenges are quite demanding, and consequently, best suited for someone else. This also creates problems for the newly appointed, as they must now devise an entirely new culture from one accustomed to working in a suddenly outdated mode. The changing paradigm can also take years to mature, and company earnings often trend downward as this directional overhaul is being enacted.       

This post exemplifies the often competing dichotomy of optimism versus reality. Our optimism tells us that replacing an iconic leader can be done, and that his or her success is a result of company products or services, and not necessarily a unique or defining attribute of any particular individual. But reality speaks of a different message, and cites the rarity by which equally successful corporate transitions take place. It also states the mathematical implausibility of two entirely different people, producing similarly extraordinary results, in a highly competitive environment, over an extended period of time, and doing so in consecutive terms! When viewed through this prism, the likelihood of such actions occurring are akin to that improbable double lightning strike, which is not a complete impossibility, but I wouldn’t advise waiting around for it to happen, for it’s likely to be a long time in coming.

(Anthony Rhodes is a Registered Investment Advisor and owner of wealth management firm The Planning Perspective