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When considering which CEOs turned in the worst performance, there are several important criteria to consider:
1. Results: Did the CEO’s company suffer a precipitous drop in performance, as indicated by stock price, cash position, market share, or other key financial metrics? Did this compare to competitors who faced the same business environment?
2. Decisions: Was the CEO culpable in that he or she knew what was going wrong yet was unable to right the ship? What were the major decisions made by the company, and how are they going? Have they recognised major shifts in the marketplace, and are they adapting?
3. Non-decisions: What are the CEO and company not doing that they should?
4. Impact on key stakeholders: How important is the company? How much influence does the business have in everyday life?
5. Breach in corporate governance: Did the CEO’s actions, or inactions, provide evidence of a significant breach in corporate governance and strategic leadership?
With this methodology in mind, here are the five worst CEOs of 2012:
Massive incompetence:
Rodrigo Rato of Bankia (Spain)
The fifth worst CEO of 2012 is Rodrigo Rato, the former CEO of Spanish banking giant Bankia. The ongoing banking crisis in Spain precipitated many changes, one of the most important being the formation of Bankia from a merger of seven struggling Spanish banks. Rato, a former managing director of the IMF and finance minister in Spain, was tapped to lead the new bank. Unfortunately, his tenure lasted two years but not before greatly damaging the reputation of someone at the centre of European business and political circles. What happened? While engineering the bank’s IPO, Rato aggressively and assuredly hawked the stock to thousands of small investors who ended up with deep losses when the government was forced to bail out Bankia. Its 2011 profit of euro 300 million became a euro 3-billion loss after Rato’s resignation in May 2012. As someone who certainly knew, or should have known, the real condition of Bankia, Rato’s reign is reminiscent of former Enron CEO Ken Lay’s touting of his company’s stock while fully aware of the company’s deteriorating financial position. Rato is under investigation for fraud.
Incompetent acquisitions:
Mark Pincus of Zynga
The fourth worst CEO of 2012 is Mark Pincus of Zynga, the maker of games like Farmville that were ubiquitous on Facebook for a while. 2012 was a disastrous year for Zynga. Its stock was down some 75 per cent. There was an exodus of top executive talent (a key indicator of trouble), and Pincus spearheaded a $200-million acquisition at four times revenue that forced a writedown of 50 per cent of the purchase price within months. Zynga’s strategy has relied almost entirely on Facebook for distribution, the type of dependence no competent CEO would want. And the recent announcement that both companies have freed themselves to create new partnerships highlights the vulnerability of this strategy. Finally, with Zynga’s IPO, Pincus onloaded a sizeable stake as soon as the lock-up period ended, a controversial move but a clear signal of what he thought about the company’s prospects.
Poor performance:
Andrea Jung, Avon
This year spells the end of Andrea Jung’s career at the top of Avon after a string of missteps that slots her as the third worst CEO of 2012. Avon’s performance has been on a downward spiral for several years, and Jung’s marketing know-how hasn’t been enough to overcome her weak operational skills. This has played out with poor results in multiple global markets. An ongoing investigation into possible violations of the Foreign Corrupt Practices Act continues to cost the company money. To be fair, Jung is not alone at Avon. The board has had a particularly cosy relationship with her for years, perhaps entranced by her celebrity status. But with Q3 earnings down 81 per cent, stock down 18 per cent, on the year, and the dividend cut by three-quarters, Jung’s successor as CEO Sherilyn McCoy will have her work cut out for her.
Aggressive
.......visionary: Aubrey
.......McClendon,
.......Chesapeake Energy
The second worst CEO of 2012 is Aubrey McClendon of Chesapeake Energy. More than any other on this list, McClendon is the classic example of worst practice in corporate governance. An aggressive visionary who was one of the first to champion, and profit from hydraulic fracking, McClendon seems unable to keep his corporate job separate from his personal investments. He personally borrowed $500 million from a company that is a major investor in Chesapeake. He runs a private $200 million hedge fund trading oil and gas even though he is CEO of a company in the same industry. Corporate jets are routinely used for personal purposes. As part-owner of the Oklahoma Thunder basketball team, he had Chesapeake sign up for a sponsorship deal. While all of this has been disclosed, it demonstrates bad judgment because of the multiple conflicts of interest it creates, and the concern shareholders rightly have on what he might do next.
Loss of market share to
Amazon: Brian Dunn, Best Buy
Finally, the worst CEO of 2012 is Brian Dunn of Best Buy. The company’s stock is down 50 per cent, same store sales are down, EPS is down, and cash on hand is actually down 85 per cent. The Dunn turnaround strategy has been very slow in forming, and even slower in execution. Best Buy has become the showroom for Amazon, a reality that has still not fully dawned on senior executives. Converting big box stores to smaller units might reduce overhead, but doesn’t solve the essential problem that customers can often find much better prices for the same products online. Dunn also emphasised up- and cross-selling rather than improving customer service and online offerings. He continued the policy of buying back shares to support the stock price, even though fundamental problems with strategy were pushing share price down. Finally, in the midst of all this turmoil, allegations of an inappropriate relationship with a 29-year-old subordinate came to light, leading to his resignation.
When you look at these five CEO’s, the underlying and specific reasons for their weak performance differs. The details of what went wrong always varies across companies, but there were several key themes in common:
- Many of these CEO’s were unable to adapt to changing business circumstances. Dunn at Best Buy is on my list precisely for this reason. Despite the fundamental changes in the industry, Best Buy has not fully embraced the nature of this challenge and Dunn didn’t step up to lead the transformation needed. There were similar issues for Jung at Avon and Rato at Bankia, CEOs who couldn’t adapt.
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The second common factor was the inability to separate their companies’ dealings from personal ones. McClendon of Chesapeake led the brigade, demonstrating a catalogue of conflicts of interest unmatched since the days of Enron and WorldCom. When you are running a publicly traded company, where the CEO is answerable to shareholders, you just can’t conduct business this way.
Pincus of Zynga, as well as a variety of other Internet 2.0 CEOs (like Mark Zuckerberg of Facebook and Andrew Mason of Groupon) are vulnerable to falling into an analogous corporate governance trap, in part because of the incredible power they wield in their companies, coupled with boards of directors that are virtually captive to the interests of powerful insiders. -
The final common factor is the CEOs’ overconfidence in their abilities. In some ways, this is a natural outgrowth of the very success they’ve had in their careers. McClendon was a pioneer of fracking; Pincus is a successful entrepreneur; Jung has been a celebrity CEO for a decade; and Rato was in the inner circle of power in Europe.
Ironically, this very success breeds complacency and arrogance, the twin disasters that bring down so many CEOs. After being acclaimed as a giant in the business, it is difficult to gain the humility and open-mindedness absolutely necessary to deal with changing economic and business conditions. These CEO’s failed to do their jobs well, in large parts, because of this very human failing.
SYDNEY FINKELSTEIN,
Steven Roth Professor of Management, Tuck School of Business, Dartmouth College
