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 www.theplanningperspective.com)
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