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When is it a good idea to bring back your old CEO?

Ken Favaro
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If companies try to get their old leaders back to take them out of crisis, it is not a bad thing as long as the market is not radically different from the time they left and they know the workings of the company better

In recent weeks both J.C. Penney and Procter & Gamble replaced a sitting CEO with his predecessor. This back-to-the-future approach to succession isn’t common — and surely most company boards aren’t seeking to make it so. After all, returning the reins to a former leader smacks of desperation and failed succession planning. But that doesn’t make it the wrong move. In fact, sometimes it works spectacularly well: Consider the triumphant returns of Steve Jobs to Apple and Howard Schultz to Starbucks. While Jobs and Schultz were founders of the companies they came back to save, and J.C. Penney’s Myron Ullman and P&G’s A.G. Lafley were not, the rationales for their returns aren’t entirely dissimilar.

One thing we know is that companies prefer insiders — people already working for the organisation — when they hire CEOs. Splashy outside hires may get more press, but Booz & Co. has studied trends in CEO successions at the world’s largest public companies for 13 years now, and a preference for insiders has been one constant.

In our 2012 Chief Executive Study, titled “Time for New CEOs,” we found that 71 per cent of last year’s incoming CEOs were insiders, and a full 25 per cent of them had worked at the same company for their entire career. This makes sense.

An insider knows his company, including its capabilities and potential weaknesses, and is thus better prepared to lead effectively. It’s no surprise that we’ve typically found insiders to have generated higher total shareholder returns over their tenures.

We also know that you can’t understand the challenges of being a CEO until you’ve actually been one. You can never be fully prepared for the intensity, scope and ultimate accountability of the job — you have to experience it for yourself. And only 16 per cent of the incoming class of new CEOs in 2012 had previous experience being one. In fact, neither Ron Johnson nor Bob McDonald had been a CEO before taking that role at J.C. Penney and P&G, respectively.

Qualifications

At a minimum, then, returning CEOs have two features that boards should like a lot: insider status at the companies they’re rejoining and, presumably, a track record of having run those companies well.

Even if they’ve been officially out of work, they’re often close to their former organisations. As long as market conditions aren’t radically different from what they were during the returning CEO’s earlier tenure, he’s likelier than anyone else to understand the company’s true challenges and how it should respond.

These CEOs will be familiar with many of the players and able to make personnel decisions swiftly. In other words, returning CEOs know the markets, the talent and the available options well enough to act quickly — and they can be effective captains during disruptions. And since they were separated from their firms for a time, they won’t be directly associated with the current (usually poor) state of affairs.

In the case of P&G and J.C. Penney, their boards had the additional benefit of bringing back leaders who have experience leading during crises. The beginning of Lafley’s first turn as CEO wasn’t exactly a smooth ride — P&G was in serious decline when he stepped into the role in 2000 — but with strong leadership and a focus on innovation, he doubled the company’s sales over the course of his tenure.

Ullman led the French luxury goods company LVMH Moet Hennessy Louis Vuitton to double its luxury brand holdings in the 1990s. And at J.C. Penney, he managed to turn a profit even when the recession hit the retailer’s customers hard in 2010.

The corporate boards at P&G and J.C. Penney probably had little time to find the right new person — inside or outside the company — once the sitting CEO’s position became untenable.

It makes sense for directors in such a situation to give themselves some breathing room by bringing back a leader with insider status and CEO-level experience.

They can feel assured that their company is in good hands while they take the time to figure out the organisation’s longer-term leadership needs. After all, the CEO decision is the most important one a board ever has to make.

Ken Favaro is a senior partner in Booz & Co.'s New York office and the global head of the firm's Enterprise Strategy practice.

© 2013 Harvard Business School Publishing Corp.

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