Motley Fool Hidden Gems Investing - CEO Shake-Ups

Episode Date: September 23, 2023

Executives are on the move. The first half of 2023 has seen the highest CEO turnover rate on record, per executive outplacement firm Challenger, Gray, & Christmas.  Deidre Woollard caught up with Anand Chokkavelu and Ricky Mulvey to talk about what it means when a leader leaves. They discuss: Whether CEO transitions truly change an investment thesis Where to source ideal replacement candidates And recent examples of expected departures, activist strong-arming, and questionable plays Tickers discussed: PYPL, DOCN, SBUX, DIS, AZO, COST, FOX, NWS, KHC, CMG, PINS, ILMN, ETSY, PTON, FL, ULTA, WBA, PLNT Host: Deidre Woollard Guest: Anand Chokkavelu, Ricky Mulvey Producer: Mary Long Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

I saw my friend on the other side of the street. I was heading to school with the kids. I let go of mom's hand to wave. I had already forgotten their lunches. I ran over to hug her. She came out of nowhere. And then... It stopped.

Sometimes the moments that never happen matter most. Volvo's Automatic Emergency Braking helps ensure a safe ending for everyone. Learn more at volvocars.ca slash safety. I think it's like with football coaches, I think this is a case where just about anything could work depending on the situation, the company culture and the support system in place. You know, can a former player coach? Sure can. Can an offensive coordinator make the transition to head coach? Yep. What about a defensive coordinator? Yes. Can Deion Sanders rise untraditionally and be successful pretty much right out of the gate? Yeah, that can happen too. I'm Deidre Willard, and that's Anand Chakravallu.

I caught up with him and Ricky Mulvey to talk about the different scenarios that cause a leader to leave a company and how investors should think about what happens next. We discussed the lasting effects of a long goodbye, gold standards for passing the torch, and recent examples of expected departures, activist strong-arming, and a few moves that have left us wondering what the heck just happened. Let's start on a new brickie. First of all, when a CEO of a stock you own and love leaves, well, what do you think first? The first reaction for me is similar to when a couple that you know well breaks up. You know, spill the tea. Is there a juicy backstory? He did what? Then I'd probably

break the CEO leaving kind of into two buckets. One is the brand name CEOs, and one is kind of the generic CEOs. You know, brand name would be things like long tenured, a founder, led a turnaround at the company, had some big time wins at the company, et cetera. Generic would be not those things. And then whether, you know, two other buckets, right? Whether it's a small company where a CEO can really make a positive difference, or a super large Coca-Cola-type company where you're unlikely to move the needle too much unless you're spectacularly, amazingly bad doing wild acquisitions or things like that. It depends on how the CEO leaves. Have they already left? Sometimes you find out about a CEO departure after the board has announced the CEO

has resigned immediately. Or sometimes you hear about it in terms of, hey, we're going to have a six-month transition on the long-tenured goodbye tour at AutoZone. And then sometimes it's something you've almost been counting on. One instance would be Dan Schulman at PayPal. That was sort of seen by investors for quite some time. That's a little bit different than Yancey Sproul, who is the CEO of DigitalOcean, where I own a little DigitalOcean stock, and that definitely raised my eyebrow. One of the things I've noticed is when a CEO leaves, usually not great for the stock in the short term, and especially depending on if there's an interim or if there's a succession plan. I think it really can hurt the stock in a way. It can be a buying opportunity. Sometimes

it can definitely not be. I think a really good CEO transition, you kind of need a year, right? I mean, you can't expect good things to happen fast, and you can't expect bad things to be resolved fast either, right? Are you telling me and Anand this, or are you telling this to Bob Iger? Jury's out on that one. It all depends on the size of the company, right? Anand was talking about the large Coca-Cola, Kraft Heinz-type companies where it's going to take a long time to steer the ship around. Then you have some of the smaller cap ones where the CEO and founders matter a heck of a lot more to the lower level employees. I wish I had a better answer than it depends.

It always depends. Let's go into some questions that I put together about the things I ask when I hear about a CEO transition. So the first one is, why is it needed and is it needed? So there's normal stuff. Normal stuff happens. You have retirement or health concerns or someone leaves because they want to be the CEO somewhere else. And that's all sort of normal. Then you have the other stuff. So you have like an activist wants them out or there's an internal need for change or the board wants them out. Sometimes there's health concerns. And then I have the bucket that I call drama. And drama is just the wild things that happen when someone suddenly leaves. And sometimes you don't know. Sometimes it's internal drama that never makes the light of day. And

sometimes it's drama that plays out in the media. Are there any other questions on your list of why the transition might be needed? My question is, do they appear to be a cultural fit? Sometimes you can tell that from the background, the attitude. And sometimes you want someone who's the complete opposite. But I would also say that sometimes I just completely accept that the CEO of a publicly traded company, she wants to step down from her job. It's an incredibly demanding job. And in fact, last year, I had a conversation with the former CEO of Medtronic, Bill George. And we were kind of talking about just, should CEOs have term limits? Because sometimes it makes sense for someone to be there for decades and decades,

but that's a lot of power for one person for an extended period of time. one question I have is what is this CEO saying about the incoming CEO? Does it appear to be a press release or is an investor, does it look like this outgoing CEO is genuinely setting the next one up for success? Well, that sort of leads to my next thing. And that is a really good point because sometimes the CEO is just getting kicked up to be the chair of the board and that's fine. That's like a blip. But the question is, how fast is the transition happening? And we've seen this play out a lot recently because you have two things. You have sort of the immediate thing where it's like, poof, the person's gone. And then it seems like a lot lately we've had the

long goodbye. So Howard Schultz with Starbucks, the long goodbye. Certainly whatever Iger is going through, it's going to be a long goodbye at Disney. You've got Bill Rhodes of AutoZone, you mentioned, he's giving about six months to transition to an internal replacement. So do you like the long goodbye? Do you think it's good for the company or should they just start fresh? I think the long goodbye is okay as long as there is a definitive end date that is followed. From what I've seen, at least in the earning calls, Bill Rhodes of AutoZone seems to be handling this transition with grace and care. There are times, though, where I would imagine if you're the incoming CEO, it would be nice to have the ex-CEO not looking over your shoulder

on every decision. Shout out GE as well. Especially when it's those long goodbyes that aren't the, wait, we just hugged and they drove back in their car and now Howard Schultz and Bob Iger are coming to hug me again. Wait, what's going on? Wait, now there's another long goodbye at Starbucks, but wait, is he still around? You have that. Yeah. And this is where you can see some of the support. This was back when Jim Sinegal was stepping down from Costco. He told the Seattle Times about Craig Jelinek, quote, it'll be an upgrade. He is well-liked and smart and energetic and all of the things I used to be. Also, I will advise when I'm asked and try not to interfere in metal. That's kind of the gold standard, I think, for CEO transitions.

Yeah. The don't interfere in metal part seems to be pretty important. Let's talk a little bit about meeting the successor. So sometimes when we get these announcements, you get to find out right away. Sometimes you've got the interim and then you're sort of like, well, I don't know how I should feel about the interim, even if the interim is someone who you think might become the new CEO, and maybe they're just doing an external search. There's always so many variables. So where do you think the best CEOs come from? And when do you want an external person to come in versus you just want someone internal who knows the company to step up to that next role? Yeah, a lot of times, right, when you get the new CEO, you want the story to be intact, right?

Whatever that is. Ricky talked about how you want it to be different than the current one, or maybe you want continuity. I think it's like with football coaches. I think this is a case where just about anything could work depending on the situation, the company culture, and the support system in place. Can a former player coach? Sure can. Can an offensive coordinator make the transition to head coach? Yep. What about a defensive coordinator? Yes. Can Deion Sanders rise untraditionally and be successful pretty much right out of the gate, yeah, that can happen too. What's ideal? Heck if I know. And we've talked about an internal hire like at Costco. That may be the ideal outside of the case where the founder naturally grows with the company and grows their

skill sets. But external searches can work for CEOs too. They certainly get a lot more sizzle than just an unnamed internal, or not unnamed, but a under-the-radar internal candidate. And companies that are kind of floundering or then have grown more complacent, that might be kind of the outside voice that they need. Now, as for like prior experience, yeah, I mean, a COO works, a marketing person, a CFO, same goes for different types of personalities. I don't think there's a formula. I think people are complex and situations are complex and hard to predict until you actually see the situation play out. And as Deidre said, I mean, a year, I mean, I would argue a year is even too short. What I want is anything is a competent person

who's very motivated at that point in their career and who has the time and is given the time to make changes and decisions that need to be made. And going back to how important the situation, company culture and the support system is probably more important than anything else is stability. If you're the fifth CEO in 10 years, it's probably not going to work out for you. It's like a Cleveland Browns quarterback. Exactly. All right. So kind of building on that, I put together a list of questions on whether or not it would break my thesis of the company, because sometimes it will and sometimes it won't.

So first thing I ask myself, we talked a little bit about this, like, does the company need to change? And sometimes I'm really excited to see a new CEO, especially if I just feel like the company's been going down a road I don't like, the numbers aren't where they should be, then I want the change. I'm ready for it. Sometimes if this was a founder thesis, if the old CEO was the founder or has been the CEO for 20 years, sometimes it's time to move on.

Sometimes if it's a founder, especially a founder that is like very, been very connected the whole time and then they leave suddenly, that will worry me and potentially break my thesis. I ask myself, is the company tied to the CEO's identity? And is this like, do you think of, when you think of the company, do you immediately think of that CEO? And if so, then that sometimes can be a concern. I mean, Apple and Tim Cook is the obvious example with when Steve Jobs had to leave. Um, you know, does this new CEO have an extra grind about something? Are they going to need to make things their own? Sometimes, sometimes I want to see that. I want to see them feel that need to get in there and bring in their own team and, and clean house. And sometimes I really don't

want that to happen. And then the last one, I think this is an old Buffett quote, but like, could I ham sandwich run this company? Is this a company where I don't really have to worry about the CEO that much. Everything's in place. Someone's just sitting in the seat and driving this steady bus versus a company that really needs the firm hand on the wheel because this thing's a little iffy. What kind of questions do you ask yourself? I think I start asking questions about probably six months after the new CEO transition has taken place, especially for the job. To Anand's earlier point, it's so difficult to judge how a thesis could change within the excitement of the announcement period. But I also think the thing I try to do as well is

sometimes not let a CEO change, build a new thesis, because often a lot of these companies have greater problems and traumas that can't be fixed by flipping the box over. Let's run through some of the recent moves we've seen. I broke these up by category. The first one I want to start with is the expected. And we had kind of, as we were putting this together, we had a little breaking expected. Rupert Murdoch, 92 years old, finally stepping down. His oldest son, Lachlan, is taking the helm. Yes, we knew this was coming, but I think this is one of those where even though it's expected, there's probably a little drama in the offing. Any thoughts on this one? I thought Roman would get it the whole time.

That joke had to be made. I think it was about six months ago that they tried to put Fox and News Corp together into one company, and the shareholders did not want to do that. And so now you've got Lachlan taking over with two different companies in a very sort of interesting situation. So this is one, I'm not a shareholder in either company, but if I were, I would be watching pretty closely. Another one that was expected and kind of an interesting one, Toast's co-founder, Ahmad Narag, he's served as the chief operating officer. He's going to become the CEO. You had a CEO, Chris Camparatato, who held the position since 2015. And he basically kind of guided the company through going public. So you kind of like to see the co-founder ascend

here. What do you think? This is, at least in theory, set up about as well as you can set it up. You've got one of the co-founders. They're letting the new guy who's got experience take them public, but then you learn at the feet of that person. You become COO for a couple of years to smooth your way to become CEO. In theory, this should be great. We'll see how it all plays out over the coming years, but this is well done. Let's talk a little bit about PayPal. We mentioned them earlier. Alex Chris is going to be the new CEO. He's a veteran of Intuit, worked on some of their acquisitions, and it seems like a good fit here. PayPal is definitely at this pivot point. They've moved on from the sort of heady growth era. It's an interesting point at which he's

coming on. And this was expected for a while. So expected, but also reasons to be optimistic here, don't you think? Yeah, this is kind of a classic one to get excited about. You know, in the best case, this is a Chipotle situation. We had Brian Nickel from Taco Bell coming in and taking over for a founder in that case. In this one, it's, you know, you're getting that new blood that has very relevant industry experience. See also my guy, Bill Reddy at Pinterest, who had Google and PayPal experience. But on paper, it doesn't always translate. And again, each company is different and some brilliant coordinators aren't brilliant head coaches and all that. But I'm excited to follow both PayPal and Pinterest to see how these turn out. I've been waiting on Pinterest every

quarter, right? Yeah. In the case of PayPal, I mean, the thing PayPal is really highlighting from Alex Chris was his ability to grow customer count and revenues over at Intuit. And so in this case, sort of the bar he's going to be living up to is, can he bring PayPal back to its growth story? Which, for a large, mature company, might be tough. Yeah, definitely. And one last one in this sort of expected category, this is sort of a classic one. Kraft Heinz, they announced Carlos Abrams Rivera as the next CEO. He began his career at Kraft. He came back to run U.S. retail sales. And it seemed like a very planned move. Like he came back and then, you know, now he's ascending transitions, not happening till January. This is just like this nice,

stable, smooth thing. It feels very much like the auto zone transition to me. Uh, you know, I'm not a shareholder, but, but if I were, I would be like, Oh, okay. This sounds good. Totally agreeing. Right. Big established company, homegrown talent, try not to dump too much ketchup and the mac and cheese and everything's groovy enough, this is the ham sandwich we're looking for. Exactly. Let's talk a little bit about the activist moves because when this happens, it's a little different. So we've had a couple of them recently. Illumina, they announced their new CEO. Their previous CEO stepped down over the summer after a proxy fight with Carl Icahn, who wants to fight with Carl Icahn. So the new CEO, Jacob Thyssen, senior vice president at

Agilent, another biotech company, long background in life sciences, feels like a good move here. I mean, I know Illumina's got some issues with that acquisition of, kind of reacquisition of Grail that they've got to wrestle with. But in this case, it feels like at least with this transition, you calm down ICON. And sometimes that's not a bad thing. What do you think about activist moves in general? I mean, before we've recorded this, we were kind of going back and forth about some good ones. I think one good one was Josh Silverman at Etsy. That was way back in 2017. Are there good ones that you can think of? I want to hear Anand's rant. I feel like he's gearing up for a rant about this. I mean, honestly, not to punt the question, right?

because I do think someone like Barry McCarthy needs time at Peloton. I think that's one that you need time. We all want to see quarter after quarter, but it'll take a while. Same with the Pinterest story. Honestly, one of my big pet peeves is activist investors meddling with quality companies. I think a company needs to be on death's door before often short-termist activist moves kind of make sense to me. Like if it's a company I believe in, or at least think has a shot, I'd rather let the company stay focused and figure things out. Now, of course, I also am someone who would give more leeway to the founder to figure things out more. I probably wouldn't have made moves at Chipotle, right? So take that with a grain of salt. But unless you're

trying to pump out small, quick gains, at least the non-activist moves have a chance of being long-term focused. And to give you that example of Carl Icahn, he forever lost me a few years ago when he was kind of nosy neighboring over at Apple. And I think he bought like a billion dollars worth of shares there and started trying to push for stuff. I only want one cook in the kitchen. And his name is Tim. Good line. Another one I have concerns about is Kohl's. The death of the department store is worrying me. Kohl's brought in Tom Kingsbury, former CEO of Burlington, like 40 years of retail experience. Activist story here too. Activists tried to oust the prior CEO, Michelle Gass. Finally got her out. She moved on to Levi Strauss, where we've got another long

goodbye happening with the current CEO, Chip Berg. We'll see if he says he's leaving. He'll eventually leave. But Kingsbury, you know, not necessarily as much of a Hail Mary, but more of a like, you need a guy who understands retail. You bring in this guy, he understands retail. So maybe they're preparing the company for sale. I know they tried to sell themselves last year. I think some of what he's doing is just getting it kind of tidied up. Right on. And one more we talk about a decent amount is Mary Dillon at Foot Locker. She had success at Ulta Beauty. Someone Deidre and I both follow. You know, a lot of optimism on the announcement about a year ago, but recently operational results say this is a tough road at best. It'll be tough and it'll be interesting to see what she does to try to turn that around. Well, let's go over some of the huh, the question marks, the uh-ohs, the I don't know, because there are a few of those lately. When Roz Brewer stepped down at Walgreens, that was one

that I found interesting because I was excited that she had gone over to Walgreens. She had previously been in leadership at Walmart and at Starbucks. I thought she was going to be the next CEO of Starbucks. That didn't happen. Felt like she was going to go over and do great things at Walgreens. Didn't really happen. That company still feels like it's in transition. I don't know why she stepped down. Sometimes we just don't know. But that one was interesting for me. I could see a regular explanation just being like, I don't know. I don't want to be the CEO of Walgreens. I would have bought that. Well, the other one that happened recently is Planet Fitness' CEO, Chris Rondeau, stepped down after the board dismissed him. He'd been with the

company for 30 years, a CEO for a decade. You know, they put in an interim CEO, former governor of New Hampshire. Craig Benson also has 147 Dunkin' Donuts franchises and is a Planet Fitness franchisee. So he knows the franchise business. What do you think here? Where is Chris Rondeau? we don't really know, but it'll be interesting to see what happens next with Planet Fitness too. Yeah. This is a little bit of the opposite of the Brewer story, where Walgreens is saying, oh, we've been surprised by this, but we're happy to have her help with the transition. The Planet Fitness CEO announcement was made after the board dismissed him, which they made very clear. There's no reason, and I think that would be concerning if I were

an investor in Planet Fitness? Because your mind goes to bad places. Is it personnel? Is it financial? Is there drama that they're not willing to share with the investors of their company? And usually the answer is because it's not something we want to. It's not good. There's one more I think we wanted to talk about. Yancey Sproul from DigitalOcean. That's another one where he's going to stick around until the new successor is found, and then he's going to step down from the board. Seems like a little bit of a different story. Again, so Sproul, I think this is almost more mournful for the DigitalOcean investors. He was one building a really strong long-term vision for the company.

While he's not leaving immediately, the thesis could change depending on who steps in. The reason I think there's a question mark for me here is, when there's a long transition, I usually like to have the incoming CEO announced with the outgoing CEO, something like AutoZone or Costco. Not happening here, which for me raises a question mark. So in the end, as we wrap up, we've talked about a lot of different types of CEOs, some kind of bombastic, some kind of folksy. How much do you think CEO character makes a difference? Is there any particular type of CEO you really like to see? Does it depend on the company?

There are definitely ones that I root for. And, you know, you want the good, well, what you perceive as the good person, right? Because CEOs are so polished that it's really hard to tell and you only get little glimpses. There are certain folks where you say, oh, yeah, that's how I like the company to be run. And you hear anecdotal stories where you're like, oh, no, that person's really good. but you also see so many times it's you know the person who you're like oh i wouldn't have done it like that oh i hate how they're doing but it might work and it and it does well and i think i think i've learned just i i think i'm kind of i tend to give the person who i believe either has a good

character a good vision or a good something i like to see more more leeway but i'm also open to the idea that, hey, this isn't my cup of tea, but I will gladly charge $8 for that cup of tea and reap some of the profits. Yeah, right. This is one where it really depends. Your CEO of Netflix is going to be, you want to see a different personality than perhaps the CEO of a peanut butter company. But regardless of the personality of the CEO, one thing I really like to see is that this person is elevating the people around them. Yeah, absolutely. I mean, in the end, it really, culture fit, culture fit really matters.

And that is something that as we've talked about, you're not necessarily going to see in the first, you know, in the first 60, 90, you know, 180 days of the CEO, but you absolutely will see it over time. Thanks for the chat, guys. This was fun. as always people on the program may have interest in the stocks they talk about and the motley fool may have formal recommendations for or against so don't buy or sell stocks based solely on what you hear i'm deidre woolard thanks for listening we'll see you tomorrow

Thank you.