When CEOs Become the Soul of a Company
Have you ever wondered what could happen to the stock price of Berkshire Hathaway (BRK-A) when its amazing CEO, Warren Buffett, is no longer able to captain the ship or passes away? This topic has swirled atop investors’ minds for at least a few years now and consistently keeps getting addressed by the Oracle of Omaha himself during Berkshire’s annual shareholder meetings. Last year, I sent my wife Cynthia to the shareholders’ meeting and she reported that the continuity or succession topic was one of the most widely talked about.
Let’s take a look at this recent stock chart from Apple (AAPL) to give us a clue at what might happen to Berkshire stock should Warren Buffett pass away or can no longer run the company. This chart shows a sudden, precipitous decline in the morning hours of October 3, 2008 after a rumor surfaced about Steve Jobs suffering a heart attack. The stock fell 8.2% in a hurry and only recovered after Apple refuted the rumor. Granted, this occurred in the middle of an ongoing global financial meltdown but it nonetheless illustrates a salient point for investors in companies run by larger than life CEOs.
One can argue that a smooth transition would result in a decline far less drastic. Nevertheless, the point isn’t so much about the intensity of the movement but rather the direction of the movement. Perhaps Berkshire investors have already priced in the loss of the great CEO. Maybe the recent plunge in Apple stock price is not just a reaction to the credit crisis but is also a pricing in of the loss of its visionary CEO. A surprise illness or death merely intensifies and shortens the reactionary response, it doesn’t negate the need to discount the inevitable and what would probably be less fitting replacement leadership.
Perhaps no other public company CEOs have become so much an essential part of their company. Apple is the very embodiment of Steve Jobs, the way he sees the world, and his will to impose upon the world his ideals and vision. Jobs’ vision is a poetic and contrarian vision - where technology is beautiful and accommodates the human. Berkshire is as much an embodiment of Warren Buffett. When he took over, the company was a struggling enterprise in a dying American textiles industry. Today, it is a massive investment conglomerate, or rather a wonderful collection, of businesses in myriad industries such as insurance, jewelry, furniture, etc. Warren Buffett’s vision is a playful and contrarian vision - where overly serious people swing from extreme greed to extreme fear and he stands to profit by watching for and catching their mistakes, like playing a yo-yo.
It is hard to argue that these two companies could remain the same without their singular leaders, regardless of how well-laid their succession plans may be. Sure, cultural DNA can be passed down much as genetic DNA travels through generations. But I inevitably see the world differently than my father as will the corporate heirs of Apple and Berkshire deviate from Jobs’ and Buffett’s visions. Shareholders are inherently nervous about the inevitable. The certainty of mortality or frailty leads to the uncertainty of change.
When Microsoft creates a product we don’t like or makes a move we don’t agree with, we blame that damned Bill Gates. Conversely if we like our new andriod phones we think Eric Schmidt is a great guy. The public sees their perception of a CEO as a reflection of the company they head. Considering this pattern it seems likely to me that if the man in charge were no longer there people would be concerned that the company would no longer have the personality he gave to it.
LadyVoIP - I agree mostly with your comment, but that is the point of my post. I don’t think that Eric Schmidt is identified or perceived as the soul of a company. Google would have two souls maybe? Larry and Sergey. But not all companies have CEOs that are so essential to the company that he/she is considered the soul of the company.
I’m not sure that Chrysler has a CEO who is considered the soul of the company.
Is it good to have a CEO that is so ingrained into a company? I’m not sure it’s good or bad. I do know that succession is trickier for companies that have such great, charismatic CEOs.
Very interesting point Allan. I think a company need a soul to keep lively its vision. Thus, customers are faithfull and happy with their brands. The problem is when the vision is very personnal CEO may become iconic and the value of the company directly linked to him with a major drawback to put all the company on the shoulders of one single person.
The challenge here is how to turn a initial vision into a culture and how to make it visible to markets.
Succession planning is always an tough issue for traditional companies. For those companies like Apple or Berkshire Hathaway where the CEO’s importance is so high, it’s even more difficult. But succession planing is part of a CEO’s job. So if as a CEO, you put your company in a state whereby it’s totally dependent of you, it seems to me that you are not fulfilling your CEO role: you’re not such a great CEO.
The task always seems more difficult ex-ante because we are used to the current CEOs presence. There has been quite a few examples of charismatic CEOs succession working well. I didn’t follow it closely but recently it sounds as if Microsoft and GE managed it?
It was certainly not my intention to say that all CEOs have this kind of sway. As the title suggests many of them are simply shrewed business professionals, not necessarily public personalities. But it is my thinking that when you have someone at the helm with a charismatic flair, the good it can do for your company image is greater than the risk of becoming dependent on them.
@ Wallen - good points. I agree too that Microsoft and GE handled CEO succession relatively well. Nonetheless, GE stock is at multi-year lows and Microsoft stock hasn’t been great either. Of course, lot of the blame lies with a macro environment that has made the entire market take a collective dump. Thanks for the thought provoking comparisons though.
@ Stetoscope - exactly. My argument is that transferring the CEO’s vision into a company-wide culture is a very difficult process. I think that in most cases, the stock market or shareholders will bail temporarily because it is unclear how new leadership will be able to carry on the legacy or improve upon it. Most times, people are uncomfortable with change.
I understand that there is a difference between being the “soul” of a company versus being a CEO superstar starving for media attention… but in a way, for the purposes of this post… they are similar.
They have both essentially become the “center” of the corporation. All eyes are on them… they are the company, the company is them.
I like Stetoscope’s last sentence. It rings familiar to what Jim Collin’s says in “Good to Great”… A company must have an executive that can share the vision and sell the vision, but not necessarily BE the vision.
(I could be remembering the book wrong…)
However, to use a pop culture analogy… It’s the difference between the X-Files or E.R. If you establish a series based on the main characters, you’re going to get screwed when David Duchovny decides to leave on you… but if you rotate the cast consistently… you get fourteen solid seasons of great drama.
Colin - that’s a great point! What an insightful way to look at it. It’s the same thing that the Sopranos would have eventually failed on. The durable day time soap operas are all about the intrigue but never too invested in one character or personality. The audience (or customers) know exactly what to expect for the most part, lots of drama, intrigue, manipulation, etc. There are minute surprises, but the essence of the soap opera stays the same throughout the years.
I second what Wallen said and would like to add that the flamboyant CEO’s will come back to haunt their companies, when succession becomes an issue.
Agreed. Which is when I want to throw my iPhone against the wall in frustration, I curse Steve Jobs.
However, unlike LadyVoIP above, I don’t “blame that damned Bill Gates” each time my IE6 crashes (which is does at least thrice daily). Bill is out, Ballmer’s in, and it really didn’t have a negative effect on investor confidence in MSFT.
And Gates had a succession plan. He stepped down as CEO but stayed on in 2000. Then in 2006 he announced his “further retirement” plans 2 years in advance. He did it gradually, and responsibly, and without the ego that’s evident in many.
The only sense I get from Steve Jobs is “mine, mine, mine!” He’s like the kid who owns the ball, puck, or net… and when he’s tired of playing the game’s over for everyone.
Doug - At some point in time, Gates was as big a part of Microsoft as Jobs is to Apple. You make a good point about Gates having implemented a responsible succession plan.
Not sure if Jobs is really “mine, mine, mine!” - at least not in the immature tone your comment might suggest. I think he has supreme confidence in his ability to figure out what consumers want better than anyone else in the company. In that sense, he wants to own the product and company direction because he wants to serve the consumer rather than himself. I just think Jobs feels he has a closer connection with the consumer than any other member of Apple.
It will be interesting to see who will take over when Jobs leaves. I’ve heard from some Apple employees that chief operating officer Tim Cook would make a great replacement. I don’t know him and I’m guessing there isn’t enough on him for the public to make an opinion.
You know, there’s this guy I talk to from time to time. He’s a veteran in industrial relations, and has led change management, leadership development, corporate restructuring, and capability building at a very large multinational corporation, for a little under 25 years. Awesome guy. Knows his stuff in ‘n out.
Often, I share with him my biggest fear at my start-up: making it too top-heavy, or CEO-centric.
I am something of a socialist at heart(which, BTW, gives me some very unique perspectives on social media!), and as part of my god-less socialist agenda, I believe in the co-founders’ society.
The co-founders’ society is the empirical group of leaders who bring the start up to life.
As parents, it is their responsibility to nurture the start-up through infancy, but also instill the seeds of self-sustenance early on, coupled with a deep-rooted injection of DNA.
This DNA embodies what the start-up is about. The vision, the idea, the ideal, the technology, the space, the plan Bs, the critical mass, the drivers, the barriers, and everything that goes through the founders’ minds before, during and after starting up.
The sustenance is the business model. A few twists and turns aside, the business model of a company shouldn’t radically change with time. If it does, it’s not the same company(which is fine…but it’s NOT the same company any more). So, the basics of the model should be ingrained early on. And it’s simple: this is HOW we plan on making money, and this is HOW MUCH it will cost us to generate that kind of income.
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For the most part, this guy I speak with…he agrees with me. Infusing sustenance and DNA into the corporation at an early stage is critical, healthy and necessary.
He adds, however, that the biggest reason this should happen is to facilitate leadership changes that are NOT modeled after successions or smooth transitions, but after natural selection.
Ballmer came after Gates. I think that was forced succession, all due respect. Natural selection ought to have picked out someone like Ray Ozzie.
Who’s coming after Jobs? Who has that same sense of aesthetic?
What happens to Oracle after Larry Ellison?
Now contrast that with Intel. Robert Noyce, Gordon Moore, Andy Grove, Craig Barrett, and Paul Otellini. It almost seems like intelligent design. But therein lies the truth. It was intelligently designed, and it was done so that each time, the company became the soul of the CEO. Not the other way around.
Anyway, Intel’s just one example. Maybe you guys can think of others. Google after Schmidt? Shouldn’t be a problem either.
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So, to build a convincing case for the stability of the “direction of the movement”, my friend keeps telling me to worry about corporate culture RIGHT NOW, while we’re still starting out.
He says: Share….every damn thing you hear, think, feel, assume, learn, and break.
He adds: Learn fast, document the learnings faster, and email them to your fellow co-founders YESTERDAY. Encourage and demand that others do the same.
And the rationale is simple, he says: “say you are burned out of your mind and need to take a month off to go to the Himalayas clad in orange. That’s a month for you, but a lifetime for your start-up.
Would you rather come back to a “we’ve had a 5% increase in sign-ups this month, just like all other months”, or a “while you were gone, we added XYZ features and we had a 15% increase in sign-ups this month. Get your ass back to the Himalayas.”
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The answer was simple, and obvious. BTW- This guy is my dad.
And more important is the fact that I pay as a lot of attention to making Marcellus an efficient, de-centralized corporation, and not a CEO-centric, stagnation-prone start-up.
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