Sydney Finkelstein, the Steven Roth Professor of Management at Tuck, has released his annual listing of the worst CEOs of 2012. This is the third year in running that Finkelstein has come out with the worst CEOs' list. This year, five including Best Buy's Brian Dunn, Andrea Jung of Avon and Mark Pincus of Zynga have found their way on the list. Two CEOS who almost (but didn’t) make the list were Facebook’s Mark Zuckerberg, and Groupon’s Andrew Mason.
Finkelstein is the author of “Why Smart Executives Fail” (www.whysmartexecutivesfail.com/) and the sequel, “Think Again,” that focuses on why good leaders make bad decisions. Here, he explains why he picked the following CEOs as the big failures this year
Topping the list is Brian Dunn, former CEO, Best Buy (resigned April 2012)
- Stepped down in April after five years of declining stock and loss of market share to Amazon, Wal-Mart, and Apple. Happened to Circuit City, happening again. Showroom to buyers is not a defensible strategy.
- Led the company in a strategy of up- and cross-selling instead of improving basic customer service and online offerings.
- Allegations of an inappropriate relationship with a 29-year old subordinate later surfaced.
- Stock down 50 per cent YTD. Same stores sales down, EPS down, sales down, cash down 85 per cent. Constant use of operation cash to repurchase shares. According to Minyanville, Best Buy has spent $6.4 billion on share buybacks since 2008, which is $360 million higher than where the stock is currently valued. In essence, Dunn and co. completely wasted $6.4 billion in cash that it could direly use right now.
In the second place is Aubrey McClendon, CEO, Chesapeake Energy (resigned as chairman, still CEO)
- CEO of America’s second-largest natural gas producer and champion of hydraulic fracking has a long history of mingling personal and company finances exposed. Often seen as an aggressive visionary, he was forced to sell all but 1% of his shares in 2008 and since then was allowed to run amuck by Chesapeake’s board. The board stripped Aubrey of his Chairman title, but he remains CEO. Stock down 20% YTD.
- Documents reviewed by The Wall Street Journal show that several major Wall Street banks lent Aubrey money and then received lucrative work as public-offering underwriters or financial advisers to Chesapeake.
- Personally borrowed $500 million from EIG Global Energy Partners, which had also been a large financer for Chesapeake. In securing personal loans from his company's business associate, McClendon exposed himself to a potential conflict of interest, as it's reasonable to expect him to feel pressure to serve EIG's interests in future corporate transactions, potentially at the expense of the best interests of shareholders.
- Reuters exposed a $200 million hedge fund trading oil and gas McClendon ran at the same time he was CEO of Chesapeake -- an obvious conflict of interest.
- Personal piggy bank and conflicts of interest. While all disclosed, actions are opposite of appropriate corporate governance and leadership: Company jets for personal purposes, Chesapeake employees working for McClendon personally, corporate sponsorship deal for Oklahoma Thunder while McClendon was an owner of the team), old friends on board. Reminds me of Rigas family of Adelphia (not disclosed, so they ended up in jail), and other CEOs who couldn’t keep personal and business sides of life separate.
Andrea Jung, Chairman of Board, Avon (resigned as CEO April 2012) is third on the list, A long string of poor performance – missing analysts’ estimates, failure to fix operational problems were responsible for her bad performance.
- Didn’t groom successor; so board went with Sherilyn McCoy, JNJ Vice-Chairman.
- Marketing capabilities are paramount in a company that needs operational skills to get back on track (like Carly Fiorina). And no COO since 2006.
- Rejected $10.7 billion offer from Coty (Avon market value in 2004 was $21 billion; today it is $6 billion).
- Forced to step down as CEO in 2011; is now the Chairman end Dec 2012 (1 year earlier than planned). Weak board that enjoyed working with celebrity CEO. When fired as CEO, kept her on as Chair. When announced resignation at Chair, has contract to stay as senior advisor. Cushy.
- Stock at $14.50, down 18 per cent on year while Q3 earnings were down 81 per cent. China sales down 31 per cent and dividend was cut 74 per cent.
- The US Justice Department, Securities and Exchange Commission and Avon’s board are looking into possible violations of the Foreign Corrupt Practices Act, which bars bribery of foreign officials to get or keep business. Avon disclosed the probes in October 2011.
In 2011, Avon spent $93 million investigating the bribery scandal. $300m already in legal expenses.
Mark Pincus, CEO, Zynga is in the fourth place. To his discredit are the following facts:
- Stock down 75 per cent YTD. Number of users going up, number of paying customers going down.
- Incredible exodus of top executive talent, always one of the biggest warning signs for impending disaster.
- Another incompetent acquisition: OMGPOP for almost $200 million (4x revenue). Writedown of 50per cent of purchase price after 7 months. Unclear why it was necessary to buy this company (makes “Draw Something”) instead of copying it, since there are no barriers to entry.
- Totally dependent on Facebook for revenues (90per cent ), so that when FB changes Zynga must adapt super-fast.
- Pincus onloaded 16 million shares after IPO lock-up period ended, not a crime to be sure, but a clear signal on what he thought of the company’s prospects.
Rodrigo Rato, President, Bankia (Spain) is fifth on the list. The former finance minister and MD of IMF (2004-2007), extremely well-connected at the top of Spanish and European political and business circles became CEO of Bankia in 2010, resigned in May 2012. Bankia is a new Spanish bank formed from the merger of 7 other banks, as part of the Spanish banking crisis.
- Promoted the health of Bankia, and sold shares to hundreds of thousands of small investors not long before Bankia was bailed out by Spanish government.
- 2011 profit announced of 309 million euros, restated to 3 billion euro loss after Rato’s resignation.
- Rato is now under investigation for fraud.
- IPO came at a time where management had to know the extent of the damage in the bank. Either it was fraud, or massive incompetence.
Mark Zuckerberg, Facebook and Andrew Mason, Groupon are the two CEOs who almost (but didn’t) make the list. 2012 has not been good for both the CEOs, with Groupon’s business model in particular coming under attack.
While Facebook stock YTD has fallen 30 per cent, Groupon stock YTD has been down 80 per cent. FB has moved late to mobile, but at least it’s a major focus now. Groupon has a business model without barriers to entry, but at least Mason keeps experimenting with new products.
Finkelstein also feels both the CEOs are not mature in a traditional sense. Drinking beer during conference calls; wearing hoodies in all sorts of places does not help the corporate image. Further Finkelstein thinks there’s no reason to believe they have the management skills to run a major public company. He has also cited his massive ego at work as a danger sign.