Lululemon announced Monday that chief executive officer Christine Day will be stepping down after a five-year tenure. Shares plummeted after the statement, down 15 percent by Tuesday morning. During her time as CEO, Day helped grow the high-end yoga brand’s sales to more than $1 billion annually. She is credited with spearheading the strategy of limiting popular items in store so demand exceeds supply, effectively minimizing discounts and increasing revenue. Day’s resignation comes after the too-sheer yoga pant fiasco in March, but she maintains that her decision was a personal one.
The resignation of big name brand CEOs always presents an element of enterprise risk, especially when a transition comes as a surprise. According to a study by FTI Consulting, among companies with market caps in excess of $10 billion, 31 percent announced a CEO transition between 2007 and 2010, and 43 percent of these transitions were unplanned. The study looked at 263 CEO transitions across 35 countries. Similarly, nearly a third of investment decisions are based on the perception of the CEO. It’s clear that CEO transitions present a great deal of risk for shareholders, especially as new perceptions are formed. So what’s the best way to deal with risk mitigation during publicized CEO transitions?
Follow Apple’s lead, for starters.
Apple Inc. was essentially defined by CEO Steve Jobs. The company and the CEO were pretty much a synonymous brand, and there is no better example of a company being so closely associated with its founder and CEO. Then why did Apple’s stock price only dip five percent in after-hours trading when Jobs resigned? The company had a plan:
- Two years prior to Jobs’s resignation, Apple announced a comprehensive succession plan and Jobs made his illness publicly known. He also introduced his successor, Tim Cook to the world.
- People liked Tim Cook. By the time he took his role as CEO, he was well-known and liked by stakeholders.
- The board at Apple protected share value by conducting due diligence to ensure Jobs’s heir possessed all the right qualities. Cook had 14 years experience as Apple’s chief operating officer, and he knew the ins and outs of the company and the industry.
Of course, such a succession is easier said than done. There is only one Apple, and not every COO can smoothly step into the CEO role under such publicized circumstances. In fact, 80 percent of new CEOs have no prior CEO experience, despite prior track record being critical to investors. However, Apple’s example can be replicated.
Moreover, the FTI study suggests that investors are becoming less interested in the soft skills a new CEO might possess (leadership style, charisma, etc.), and increasingly concerned with vision and a plan for the future. According to the study, the most important measure of effectiveness for investors was execution of strategy (80 percent); effectively communicating to stakeholders is also critical. Sharpening the corporate narrative and linking it closely to a vision and strategy is the best way to achieve this, says FTI.
Since a CEO transition creates an element of enterprise risk, companies should make CEO succession planning a priority. Of course, succession plans can’t take into account every single factor that will affect the transitions, but they will create a process to follow.
About the author
Meghan Tooley is a commerce student and active online blogger from Winnipeg, Manitoba. She often offers her views on employment trends in the recruitment industry. She writes on behalf of Metric Marketing, a Winnipeg SEO firm. For more information about executive search, visit People First HR Services.