Personnel risk: Changes at the top

Every company faces personnel risk to some degree, and the risk is magnified when you look at top level executives. Replacing a CEO or other big-name employee is always a considerable task, but the stakes are raised when the move is made publicly with extensive media coverage. Does an organization have the ability to manage the transition and effectively control the damage an uncertain future can do to both the brand’s reputation and the stock price? We’ll take a look at a few recent examples to see if there’s anything to learn about how to handle high-profile personnel changes in order to protect the company’s value.

In perhaps the most well documented CEO succession in history, the late Steve Jobs handed the reins of Apple to Tim Cook in August 2011. In this case, the change was planned well in advance. The deteriorating health of Jobs was the determining factor in the timing of the move. Cook was hired by Jobs and had been a top executive at Apple for over a decade, taking three turns as interim CEO as Jobs addressed health issues. Apple and their strong marketing team left no doubt this move was a smooth transition between leaders who shared a clear vision for the company. Stock prices dipped after the move was announced, but quickly rebounded and climbed steadily for the next year. It was clear to investors that stable leadership and strong underlying fundamentals made Apple a sound investment.

Another seemingly successful swap at the top came as Groupon fired founder and former CEO Andrew Mason, following a poor quarterly report and a nearly 25% dip in stock prices. After his ousting, Mason wrote a candid and reassuring letter to employees (and the public) placing the blame for the company’s troubles on his outgoing shoulders and, in his own quirky style, praising those left behind. The message was sent that the company had a vision, and a now major obstacle was out of the way.

Clearly there are a few differences between these two examples, but two key ones are the positions of the companies in their markets and the reasons for the change in leadership. Apple is a market leader in the technology field with a decade of stability, while Groupon’s business model is at best unproven. The difference between a planned transition and a sudden termination is obvious. But what is striking is the reaction of investors, as Groupon saw a stock price move similar to Apple’s, a rebound followed by sustained growth. Groupon is presently up 75% from its post-earnings-report low. It appears Mason’s letter, combined with new strategy (and a serious discount off the initial stock price), was enough to encourage the market to take a chance on Groupon’s future. With a positive story to provide investors, Apple and Groupon were able to successfully mitigate the risk high-profile personnel changes bring to the company’s financial outlook.

In a similar manner, Lululemon has tried to control the spin of former CEO Christine Day’s resignation and to give a “business as usual” vibe to its customers. Day led the company through five successful years and helped guide it through an embarrassing product recall, but resigned in mid-June, leading to a nearly 20% drop in stock value. Lululemon has tried its hand at controlling the public view of the situation with humorous “CEO wanted” advertisements in its stores and on Facebook. So far, investors have seen through the marketing spin like a pair of black yoga pants, instead focusing on flattening growth and increased competition in Lululemon’s target market, leaving stock prices depressed and with an unfavorable outlook. Unlike Apple and Groupon, Lululemon has not been able to protect its market value from the uncertainty surrounding its corporate leadership, especially given the company’s other ongoing business risks.

These examples paint an uncertain future for Men’s Wearhouse, which fired founder and spokesman George Zimmer last week. Unlike Mason, Zimmer publicly stated that his dismissal was a contentious split as he disagreed with the company’s plan for the future. Stock prices dipped in the days following Zimmer’s dismissal, and customers are threatening boycotts, but the price has rebounded and market analysts are looking at strong first quarter results as a reason to stay bullish. However it appears Men’s Wearhouse is targeting a new audience, the Millennials, and it’s unclear how successful they will be in reeling in this new market. This may increase the operational risk in investor’s eyes, but also could be seen as an opportunity the company is trying to seize. Men’s Wearhouse has attempted to control the public outcry, releasing details of Zimmer’s power struggle with the board. Since the marketing spin of personnel changes has not had a clear impact on stock prices, it appears the long-term outcome for Men’s Wearhouse will likely be in line with the investors’ answers to the question, “Do you like the way they look?”

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