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The appeal of the encore CEO

Wharton faculty say that asking a CEO for an encore performance signals that a company is in dire straits, and awarding the lead role to a proven winner may be the best solution.

Steve Jobs at Apple, Paul Allaire at Xerox, Henry Schacht at Lucent Technologies, Lawrence Bossidy at Honeywell International, Kenneth Lay at Enron and Ted Waitt at Gateway are high-profile CEOs. But they have more in common than that.

They are CEOs who, for one reason or another, left the top spots at their companies only to return to take command later when their companies ran into difficult times. Is bringing back a CEO in such circumstances a good idea? Or do companies and their boards of directors assume risks when they look to the past for saviors?

Wharton faculty members and the head of a human resources consulting firm say that decisions to bring back CEOs are not common; companies are not prone to courting the kind of instability that comes with playing musical chairs in the executive suite. Asking a chief executive for an encore performance does, however, signal that a company is in dire straits and that awarding the lead role to a proven winner may be the best way to handle the crisis.

"I don't think it's common at all," Robert E. Mittelstaedt Jr., vice dean and director of Wharton's Aresty Institute of Executive Education, says of rehiring a CEO. "In every single case I've seen, the companies have been in deep trouble--not trivial trouble, but life-threatening trouble."

"I'm always reluctant to second-guess someone on a decision of this magnitude, but it looks like the boards made good moves in most of these cases," says management professor Michael Useem, director of Wharton's Center for Leadership and Change Management.

In every single case I've seen, the companies have been in deep trouble--not trivial trouble, but life-threatening trouble. Paul Allaire became chief executive of Xerox in 1990 but brought in an outsider, Rick Thoman, as CEO in 1999. After 13 months, Thoman was shown the door and Allaire took over once more. Henry Schacht successfully led Lucent from 1995 to 1997 after AT&T spun off the maker of telecommunications equipment. Richard McGinn replaced him. But McGinn stepped down after a series of profit warnings and revelations of myriad problems at the company in 2000, and Schacht was brought back.

Steve Jobs co-founded Apply in 1976 but was ousted by John Sculley in a power struggle in 1985. Jobs returned to Apple in 1997, introducing new lines of computers and leading Apple back to profitability. In January 2000, Ted Waitt relinquished his CEO title to president Jeff Weitzen to spend time in semi-retirement. But a year later Waitt replaced Weitzen as CEO when Gateway was facing a sharp slowdown in personal computer sales.

Some of these leaders gave up their positions voluntarily, others under pressure. But at least as far as the underlying health of the companies is concerned, these cases display more similarities than differences.

The most recent rehirings of well-known CEOs took place at Honeywell International (formerly Allied Signal) and Enron. Lawrence Bossidy served as head of Allied Signal from 1991 to 1999. One year after overseeing the acquisition by Allied Signal of Honeywell--the newly combined company changed its name to Honeywell International--Bossidy retired.

But Bossidy rejoined Honeywell International in July, replacing Michael Bonsignore after the European Commission thwarted General Electric's attempted takeover of Honeywell. Honeywell, too, has been struggling. Its net income fell by more than 90 percent in the second quarter. Bossidy is expected to try to strengthen the industrial giant's performance before trying to find another buyer for it.

At Enron, Chairman Kenneth Lay agreed on Aug. 14 to assume the post of president and CEO, a position he held for 15 years before the job was turned over to Jeff Skilling earlier this year. Although Skilling had originally been recruited by Lay, news reports suggest that recent setbacks experienced by the huge energy provider led to Skilling's abrupt decision to leave the company.

"I think companies under stress are looking for a couple of things to happen," says David Russo, CEO of Empliant--an HR consulting firm in Raleigh, N.C.--and executive vice president at large of the Society for Human Resource Management in Alexandria, Va.

Replacing an under-performing CEO is a mark against the board. But companies are always making mistakes and correcting them quickly, and that's good. "They want to bring someone into the organization with a track record that says they are able to carry out implementable tactics (that lead to success). But because that person's history with that organization has been visionary, companies also want someone whom people inside and outside the organization can get psyched up about. Internal and external imagery is a factor, and I think it makes a lot of sense to do that in a company that's struggling."

Useem says bringing back a former CEO "looks a little bit odd because the action confirms that the board made a mistake in picking the person that the board itself picked--like Richard McGinn at Lucent. On the other hand, companies make mistakes all the time. It's in the nature of taking risk. So replacing an under-performing CEO is a mark against the board. But companies are always making mistakes and correcting them quickly, and that's good."

However, Peter Cappelli, director of Wharton's Center for Human Resources, says rehiring a CEO may signal more than just a hiring mistake. "First, it reflects frustration on the part of the directors," Cappelli says. "Second, it reflects the lack of any clear idea about what should be done (to turn the company around) and how it ought to be done."

If the directors knew exactly what was needed they could find the right person for the job, Cappelli adds. "But they don't know what needs to be done and they have no confidence that they can find someone who can do it.

"It's not that the board is incompetent," Cappelli says. "The problem is that nobody else knows, either."

Rehiring a CEO would probably sit well with employees, especially if the executive was successful before. But Useem says it is essential to communicate with workers to let them know what is going on. "Aggressive internal communications is really important. A standard principle in corporate communications is if you're in a position of knowing something at the top of the company and don't communicate it, employees will make up rumors to fill the void. If you don't explain, for example, why Henry Schacht was brought back in, that can get top management into trouble. It can lower morale."

Having a former CEO returning for an encore may also make it more difficult for a company to recruit the next CEO. "I think it makes it tougher for someone to come in and follow the legend a second time," says Russo. "It's like following (former Green Bay Packers Coach) Vince Lombardi or Jack Welch." It would be best if the ego of the subsequent CEO could take a back seat to the good of the company.

"What it takes is a humble person," says Russo. "That means a big person who doesn't have to come in and immediately put his or her brand on the company but can nurture it."

Useem says qualified candidates may also be reluctant to take the job if the former CEO had extraordinary influence with the company before he was brought back and if he will continue to be influential in the future. Allaire, for instance, remained on Xerox's board after he gave up the CEO spot the first time around. Says Useem: "A new person may be reluctant to come in if the former CEO is formally close by."

(Anne Mulcahy replaced Allaire as CEO on Aug. 1, when she assumed her new duties as president and chief executive of Xerox, where she had been president and chief operating officer. Allaire will continue as chairman until his retirement at the end of the year. In a statement July 26, Allaire said, "This leadership transition is consistent with the board's plans developed last year when I returned as CEO and Anne was named president and COO.")

Whether a returning CEO will succeed depends on many factors. "Is the business still a viable business?" Russo asks. "Does it have the right players in the organization to do the turnaround? And, just as important, has the ship of opportunity sailed for any number of different reasons? Or is it just too late?"

 
To read more articles like this one, visit Knowledge@Wharton.

All materials copyright © 2001 of the Wharton School of the University of Pennsylvania.

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