It's been a cruel September for CEOs and board chairmen at blue-chip companies. On Tuesday, Sept. 5, Ford and Viacom relieved their CEOs, William Clay Ford Jr. and Tom Freston, respectively, of their duties. Yesterday, two more bit the dust. In the wake of a burgeoning snooping scandal, Hewlett-Packard announced that board chairwoman Patricia Dunn would step down. And, acting at the suggestion of a former federal judge who is monitoring the company's deferred prosecution agreement, drug maker Bristol-Myers Squib effectively terminated long-embattled CEO Peter Dolan.
The moves reflect deeper problems at all the companies—legal difficulties, leadership turmoil, failing business strategies. And in no case has the resignation or replacement of the boss changed company fundamentals. So, why have the stocks of the companies either risen smartly (Bristol-Myers and Ford) or stayed steady (Viacom and HP)? To James Cramer, this is no mystery. Since the market rationally places a discount on unpopular or stumbling CEOs, stocks naturally rally when they depart the scene. Back in August, Cramer created a list of chump bosses and said that the stocks would pop anywhere from 15 percent to 25 percent if the losers would be booted out. His list included Dolan of Bristol-Myers, Michael Cherkasky of March & McLennan, Andrea Jung of Avon Products, Ronald Zarrella of Bausch & Lomb, and Robert Nardelli of Home Depot. On his television show, Mad Money, last night, Cramer was over the moon at the downfall of Dolan—"My pick for the absolute single worst CEO in America today." He gleefully drew an X through a headshot of Dolan and suggested that Bristol-Myers' stock—already up 13 percent in the past month—had further to climb.
Do such stock rises make sense? The types of pops Cramer projects—and that we've seen in Ford and Bristol-Myers—mean that poor CEOs act as multibillion-dollar drags. (So far, the market has determined that Ford Motor Co. is worth $2.2 billion more than it was with a Ford as CEO.) Can generating a 15 percent return in a matter of weeks be as simple as offering the CEO a golden parachute and a pat on the back?
In the short term, why not? Clearly, Bristol-Myers stock—a real stinker in the past five years—was hurt by Dolan's multiple missteps on everything from accounting issues to fumbling negotiations with firms that made a generic version of its blockbuster drug Plavix. The FBI raided his office, for God's sake. And in Ford's case, investors clearly believe that an outsider such as new CEO Alan Mulally will have the fortitude and freedom to enact the sweeping changes that an insider like Bill Ford couldn't.
But there's an irony here. Investors are presumed to be spooked by uncertainty and reassured by stability. And yet in these instances, the CEO firings all point to greater uncertainty. At Bristol-Myers, no permanent successor to Dolan was named. At Ford, Mulally has no auto industry experience. At Viacom, the new boss is a longtime Sumner-Redstone confidant without much of a public profile. Still, investors seem pleased. Like Chicago Cubs fans in the spring, they show an admirable ability to ignore the record of screw-ups and failure and face the new season with a sense of hope. They presume that the future unknown quantity must be better than the past known quantity. And some recent examples should give investors reason for hope. Disney has done quite well since Robert Iger succeeded the highly unpopular Michael Eisner last October, for example.
Investors have to determine whether the switch at the top signifies something larger. In some of these recent moves, it's unclear what precisely has changed besides the name at the top of the organizational chart. Yes, Ford is set to unveil a new, more far-reaching restructuring plan as early as today, according to the Wall Street Journal. But who is to say that it will be more successful than two or three previous restructuring plans, and that it will change the fundamental problems Ford has of declining market share, poor product mix, and heavy legacy costs? Whether Tom Freston or Philippe Dauman is the CEO of Viacom, it faces the same issue: a frisky octogenarian who owns a controlling interest and wants to run the show. And Bristol-Myers faces the same difficulties that all the huge pharmaceutical companies do: how to replace cash-cow prescription drugs when they go generic.
Sometimes, companies' stocks are beaten down not just because they're saddled with a bad CEO. Sometimes, they're beaten down because they're saddled with a bad business model.