CEO SHUFFLE: Study Finds Shifts Can Bolster Performance
By CHRIS CZIBORR
Change at the top can be a good thing.
A University of California, Irvine, study finds that chief executive sackings among big companies in the late-1990s had a positive impact on performance.
The look at 32 Fortune 500 companies that shifted executives in 1996 and 1997 showed sales went up after a new boss came in. Operating profit and return on assets also rose when compared with companies in the same industry.
The study looked at results two years before and after an executive shift.
Margarethe Wiersema, the Graduate School of Management professor who did the study, said the results hinged on whether industry averages were factored in.
Return on assets actually fell for companies that shifted executives, going from an average of 2.6% to 2.4% after a dismissal.
But return on assets jumped from 0.9% before a dismissal to 2.3% after an executive shift when factoring in industry-specific averages.
Yearly sales gains went from an average of 23.5% to 33.7% at the companies, without looking at industry averages.
Local search and turnaround firm executives say the results match what they’ve seen.
“Around 99% of the time companies get into trouble because of leadership,hands down,” said John Ausura, a Chicago principle with Irvine turnaround firm Crossroads LLC. “It could be a host of things including bad decision-making, bad faith and other issues. CEOs tend to be emotionally tied to decisions they made in the past. Very few CEOs will say, ‘I’ve made a mistake, let’s regroup and cut our losses.'”
A company in trouble generally only improves after an executive is sacked, Ausura said.
“That hinges on the replacement focusing on what is relevant for that company to turnaround,” he said. “Replacing a bad CEO with another bad CEO isn’t going to work,the new leadership ideally has to be unrelated to the previous problems and be admired by other executives and board members.”
Orange County companies that have bettered themselves after replacing chief executives include Costa Mesa-based assisted living company ARV Assisted Living Inc. and healthcare technology systems developer Quality Systems Inc. of Tustin, sources said.
After replacing its chief executive, ARV posted a first quarter loss of $100,000, down from a $1.1 million loss in the year-ago quarter.
Quality Systems, which shifted executives in 2000, has shown steady gains. Sales for the 12 months ended March 31 were $44 million, up 11% from the year-ago period.
“We’ve seen a lot of CEOs change and typically companies do improve,” said Rod McDermott, who heads Irvine executive search firm McDermott & Bull Inc. “Especially with the difficult economic times we’ve had recently, a new CEO looks more objectively at problems and doesn’t have as many ingrained relationships with senior management. The new leadership can better make the changes needed to get the company back on track, more so than the incumbent was able to.”
McDermott pointed to Irvine-based Autobytel Inc. and Costa Mesa-based Tickets.com Inc. as companies with new chief executives that are shrinking losses or are moving from being in the red to being in the black
“New blood gives workers new energy too,” he said. “Bringing in someone new can accelerate a positive trend.”
In most cases, directors and shareholders are justified in making executive changes, contends Dave Prolman, head of San Diego turnaround firm Prolman Associates, which has an Irvine office.
“If the CEO wasn’t maximizing profitability, then you can make that change,” he said. “If a CEO has a style of management that isn’t conducive to the change required for a business, then a change is warranted.”
But changing executives is just half of the battle, according to Matt McGowan, who heads the Irvine office of Los Angeles executive search firm Career Strategies Inc.
“A new leader has to walk a fine line,the first thing they’re going to do is tighten things up and reduce overhead costs,” he said. “That could be a good thing or bad thing,bad if they aren’t taking a strategic approach to their cuts.”
Companies slashing research and development budgets could save money but suffer in the long run by hurting their ability to compete, McGowan said.
“It’s not enough to just make the value of stock look good for a couple of months,” he said. “The long term is the real test,any CEO can come in and cut back, lay people off, slash budgets and make the books look good for a while.”
