A company, regardless of the product or the service it offers, needs a very good management system and a good management team. A company with a good product can end up broke if the top managers cannot handle the company’s operations and finances. As an investor, you should care about the person in charge of the company you plan to invest in and most importantly when the person in charge is replaced.
There are many reasons that a top manager of a company might change but we can broadly classify them into four groups and all of them are bad for the company (maybe except for one of them).
This reason is, somewhat, not the worst thing that can happen for a company but also not the best thing. Many times, especially in a young or small company, if a manager is very good, he or she can be recruited by another larger, more prosperous and more prestigious company.
This transfer is maybe good for the receiving end but the giving company may find some difficulty replacing the missing person. After all, the manager was so good that (hopefully) a better company became interested in him or her and in most situations, the company did not have a better option in the first place.
So, once the manager leaves the company, there is a gap in the management system which may not get filled the way it should with the existing employee. Even if the management decides to choose an outsider to fill the position, the costs can be very high.
Maybe the most recent and notable example of such changes involves Dara Khosrowshahi who became the CEO of Expedia in 2005. During his 12 years tenure in Expedia, the company was thriving despite the bad market and a few recessions. In August 2017, he was appointed as the CEO of Uber, replacing Travis Kalanick. Uber’s environment had become very toxic due to the feud between Mr.Kalanick and some of the investors and arrival of Mr.Khosrowshahi became a relief to this situation. Although this change to the board of Uber can be viewed as a good thing, Expedia, however, may have a hard time finding a replacement for Mr.Khosrowshahi. It is an example of a manager who was too good and was recruited by another firm.
Actually, you should prefer the previous situation. If the manager was too good, you know that the company is in a good shape and if the successor can only keep pace with his or her predecessor, things will be fine.
However, if the manager was too bad and was replaced due to his incompetence, you should be even more worried. If the guy was bad at his job, the company and the business must be in a bad shape and even if the successor is really good, the damages might be irreversible or take years to be undone.
An example of this unfortunate situation lies in the history of the all-time largest company by market capitalization, Apple, Inc. Steve Jobs, the founder of Apple, convinced John Sculley, who was working at Pepsi, to join Apple. Mr.Sculley became the CEO of Apple in 1983 and persuaded the board of directors to strip Jobs from his positions. Mr.Sculley was the CEO of Apple for 10 years and during his tenure, the company suffered from bad decisions, large marketing expenditures, and failed products. The board of directors forced him to resign in 1993 and he was replaced by Michael Spindler who was in turn replaced by Gil Amelio. In 1997, Mr. Amelio was replaced by Steve Jobs who transformed the company.
Mr. Sculley was a good manager in Pepsi but he was not very good in Apple. During his tenure, the company suffered and it took many years and three different successors to bring the company back to track.
This reason, obviously, has nothing to do with the overall performance of the manager. Many managers may step out of their boundaries and create scandals which may create legal trouble or not.
Although the manager might be very good at his job, the scandal usually forces him to resign or be fired by the board of directors which, naturally, creates a sudden gap in the firm which may not be filled properly in such a quick decision. Even if the successor is a good manager, the company will suffer from legal costs, lawsuits, settlements and a distortion in its image and reputation.
Roger Ailes, the president of Fox News, is an example of such managers. Roger Ailes had a crucial role in building the business to what it is right now. However, several women had accused him of inappropriate sexual advances toward them. In 2016, Gretchen Carlson, an anchor of the network, filed a sexual harassment lawsuit against Mr.Ailes which resulted in his resignation. Mr.Ailes didn’t do very badly since he received $40 million after resignation. However, Fox suffered heavily as the result of this scandal. The settlement, reportedly, cost Fox somewhere between $20 to $40 million to the settle the case.
Finally, a manager might retire or leave the job for any reason. He or she might suffer from a health condition or maybe wants to spend the rest of the days on a sunny beach. This form of exit is the inevitable outcome for every manager and since it is a predictable and reasonable process, a suitable replacement can be found.
Also, if the replacement is not satisfactory, the retired manager can make a comeback, even though temporary, to sort things out. So, this form of change in the management is really not an alarming sign for the investors and although they have to consider this change, it should not cause them any panic.