Retired CEOs Make a Comeback
from
January/February 2002
by John R. Engen
Hours after Honeywell’s proposed merger with General Electric fell through in July, the Honeywell board did the predictable: thanked CEO Michael Bonsignore for his hard work, and promptly fired him. Then the directors announced who’d be taking Bonsignore’s place: his predecessor, Lawrence Bossidy, 66-year-old former CEO of AlliedSignal, the company that had acquired Honeywell a year earlier and now bore its name. Bossidy happily took the helm again, promising to “move quickly and aggressively to rebuild the confidence” of rattled shareholders.
As uncertainty roils the economic waters, the idea of piping a former CEO aboard as savior of a struggling company seems to have gathered luster. In just the past 21 months, the boards of Lucent Technologies, Xerox, and Campbell Soup, among others, have called upon retired chief executives to head their companies once more.
“It’s a sign of the times,” says Ted Jadick, co-chairman of global board practices at Heidrick & Struggles Inc., a New York City search firm. “Boards today are under pressure to deliver, and if their company isn’t performing, it means making a change at the top.” But even as boards become more willing to replace top executives as a way of getting results for impatient shareholders, the market for managers with the experience and depth needed to lead complex organizations is tight. Other constituencies as well—customers, lenders, and employees among them—want “a steady hand at the tiller, someone with scar tissue who knows the business and can hit the ground running,” Jadick says. “Who better, at least in the short run, than the former CEO?”
Practically speaking, that’s also more cost-effective than trying to attract a top executive from another company. Yale Tauber, an executive-compensation consultant with William M. Mercer Inc. in New York City, says boards must already pay a hefty severance package to a fired CEO, and almost always have to offer an additional multimillion-dollar bundle of cash and equity to lure a qualified candidate from elsewhere. In contrast, a former CEO already has equity in the company. “When you hire from the inside, it costs less than hiring from the outside,” says Tauber.
For the returnees themselves, ego can play a considerable role in the decision to come back, particularly if the CEOs who followed them messed things up. “They’ve made a great emotional investment in building the company,” Tauber says, “and as a matter of pride, they don’t want to see it come tumbling down.”
Henry Schacht, now 67, served as Lucent’s first CEO, from its 1995 spin-off by AT&T until October 1997. His successor, Richard McGinn, missed earnings targets early on and even had to restate earnings for previous quarters. In October 2000, with the company’s shares trading at all-time lows, Schacht returned, hatchet in hand. He laid off tens of thousands of workers while eliminating little perks, such as free coffee, for the survivors. Alas, Lucent stock fell about 80% during the first year of his second watch.
Many return stints are temporary. In May 2000, Xerox’s board pushed out CEO Rick Thoman and rehired Paul Allaire, who had handpicked Thoman as his successor only 13 months earlier. Allaire, who’s now 63, didn’t plan on staying long. Instead he began mentoring a new heir apparent—Anne Mulcahy, a 49-year-old Xerox lifer who’d gotten her start as a field sales rep. Last August Mulcahy was named CEO of the struggling copier company. Time will tell whether she lasts.
This back-from-the-dead hiring strategy isn’t to everyone’s taste. Charles Elson, director of the University of Delaware’s corporate-governance center, says that although replacing a CEO with a former chief executive may be a nice quick fix, it usually fails to address the deeper problems behind poor performance and also sets a bad precedent that can hurt future recruitment efforts.
And do some CEOs devise their own return? Elson notes that most of those who’ve made a comeback remained on the board after their first departure from the top job. Bossidy, in fact, was Honeywell’s chairman until six months before the GE deal was announced. A former CEO’s continuing presence undermines the authority of the new leader, says Elson, and creates an “unhealthy dual power structure” that can blunt the new chief executive’s effectiveness. In some cases, failure is all but inevitable. “The presence of a retired CEO on the board—and the fact that he’s relaxed, ready, and willing to come back—makes it almost a fait accompli that his successor will fail,” Elson says. “It becomes, in essence, a self-fulfilling prophecy.”
Tauber suggests that rather than hire a former CEO, a board should look to put an outside director with CEO experience in charge. That’s what happened at Goodyear, when the tiremaker’s board appointed one of its members, former Rubbermaid CEO Stanley Gault, to the top post. Gault stayed for four and a half years, until Samir Gibara, a lifelong Goodyear employee, took the job in January 1996. Once Gibara was in place, Gault, who’s 75 now, left the board.
Even this strategy has its pitfalls. Outside director William Waltrip, 64, is on his second run in five years as CEO of Bausch & Lomb Inc., the Rochester, New York, maker of eye-care products. A search for another successor is under way. But because Waltrip has stepped into the role twice, his continued presence could make finding good candidates tougher. “If I’m a candidate, and I see what the board did to the last guy, why would I want the job?” Elson asks.
He says that boards should encourage outgoing CEOs to follow the example of Alfred DeCrane Jr., who retired as Texaco’s top dog in 1996 and left the board at the same time. “He said, ‘I ain’t coming back,’” Elson recalls. “He knew that was the best thing to do, for his successor and the company.”
But then, what would DeCrane say if the newly formed ChevronTexaco got into a jam and begged for leadership that only he could give?
