Reimagining the CEO
The traits required to lead in the 21st century
Think for just a minute how many changes have been made in the corner offices of retail companies over the past two years. There have been switches at the top for Best Buy, Costco, Kroger, American Eagle and several others — not to mention high-profile and headline-grabbing stories about CEO changes at J.C. Penney, SUPERVALU, Wal-Mart and — just last month — Target.
In the cases of Costco and Kroger, the changes were well thought-out and the transition seamless. In others, turnover was more tumultuous, prompted by shrinking fortunes and growing tribulations.
There’s no question that the retail industry is in the throes of implausible and dynamic change, and most industry watchers expect the velocity of change to only increase over the next five years
What does it all mean for retail’s top leaders? Is the industry on the cusp of a CEO exodus? Will the next generation of CEOs be plucked from outside this once-insular industry, or is it time for new energy and fresh thinking from within retail companies? How long is too long when it comes to CEO tenure? And is there a strong correlation between CEO tenure and financial performance?
These are some of the questions STORES sought to answer when it commissioned Philadelphia-based Hay Group to conduct exclusive research on retail CEO tenure. A list of 101 public companies drawn from the S&P 1500 was evaluated earlier this spring. Some of the key findings were expected; others were more eye-opening. The research revealed:
- Nineteen retail CEOs have been leading their companies for one year or less, while 17 execs have held the top spot for 15 years or more.
- L Brands CEO Les Wexner can lay claim to the longest tenure of any retailer on the list, logging 51 years at the post.
- The average age of retail CEOs is just over 57. Twelve are under 50, while 14 are 65 or older.
- Seventy-eight retail CEOs were “home grown.” Executives in that group have spent an average of nearly 22 years with their company and just over nine years in the top post.
- Ten companies on the list posted three-year averages of 25 percent or better for both total shareholder return and earnings per share. Of that group, six have CEOs with tenures of five years or longer.
“The fact that nearly half of retail CEOs have been in the position for one to five years is consistent with other industries,” says Christine Rivers, vice president with the Hay Group. “The difference in retail is that there tend to be more family-owned companies and that leads to longer CEO tenure. There’s also a greater concentration of companies hiring from within, which in most cases is a competitive advantage.”
Still, with the retail industry evolving so rapidly, “the unknown here is whether or not there will be a need to look externally for CEO talent,” Rivers says. “Back in the day the retail CEO focused on velocity, efficiency and growing square footage by opening more stores. Today, that mindset and those competencies have shifted. Retail needs highly conceptual leaders who can assess future trends and understand the relative importance of future changes on business, employees and customers. That may require fresh thinking from outside.”
NRF Chairman Steve Sadove, the former chairman and CEO of Saks Inc., believes that while technology continues to drive industry transformation, the leadership functions of the CEO haven’t changed that much.
“The primary role of the CEO is to set the strategy for an organization, build a culture that is aligned around that strategy and deliver results,” Sadove says. “No question it’s more complicated to define a strategy and culture in a period of change. You need to be able to juggle lots of balls with both hands tied behind your back. But that’s what’s expected.”
As to whether future retail leaders will be developed internally or hired from outside the industry, Sadove says all CEO hires are situation-specific. “You could argue both sides of that question,” he says. “There are great success stories where the talent is developed internally and there are others where it is more appropriate to go to the outside. I believe that the risk with an outside hire increases but there are examples of both successes and failures.”
Most industry watchers agree that there are no hard and fast rules when it comes to choosing a CEO from within the company, from another retail corporation or from a different industry entirely. Case in point: When J.C. Penney hired Ron Johnson in 2011, most experts were quick to point to his successes at Apple and Target and anoint him a “next-generation retail CEO.”
Johnson had an impressive retail pedigree and attracted a talented management team. Then the bottom fell out. In hindsight, industry observers say Johnson didn’t listen to J.C. Penney’s loyal long-term customers, refused to thoroughly test some fundamental shifts in approach and struggled with some of the basic blocking-and-tackling related to retail inventory.
On the opposite end of the spectrum is Walgreen CEO Greg Wassan. A career-long Walgreen employee, Wassan has assembled an executive team that is a mix of insiders and external hires from companies as diverse as Tyson Foods, Dell and Northern Trust. In the five years since Wassan took the reins, the c-suite has re-engineered the business, boosting both the customer experience and the bottom line.
While there may be spirited debate as to where to look for retail CEOs, most observers agree that retail companies need to do a better job of succession planning.
Walter Loeb, CEO of Loeb Associates, says the “training programs of yesteryear are gone [and] the need for training a new cadre of retail executive is becoming more evident every day.” There is “a dearth of trained people who can take over a major retail corporation and inject vision, dynamic drive, better earnings and tight control while engendering enthusiasm from both associates and customers.”
Chris Donnelly, global retail strategy lead for Accenture, attributes part of the succession troubles to the complexity of the job and the scarcity of talent that exists.
“There are some true industry titans in retail, but that generation is coming to the end of their tenure,” he says. “The question is, is there a No. 2 or No. 3 executive ready to step into that job? Bringing in the next generation of leaders is critical and one of the biggest challenges in the industry.”
A younger executive “may be savvy about the role of technology in business and less wed to the orthodoxy of the past, but at the same time [must] be cognitive of the inner workings of retail and knowledgeable about how to interact with today’s customer,” Donnelly says. “It’s a tall order. When a company loses its c-suite magic, it can be crippling.”
For Kip Tindell, the thought that the next generation of CEO leadership at The Container Store would not come from inside the company is nothing short of blasphemous. Tindell, who has been at the helm since 1978 and is an advocate for the Conscious Capitalism movement, is committed to taking care of his employees and insists that developing leaders internally has yielded better service for customers and produced better bottom line results. It has also resulted in a management team with an average tenure of 17 years.
“We have a very strong promote-from-within culture,” Tindell says. “We believe our [vice presidents] are the very best in the industry and I’d be crushed if one of them was not our next CEO. We think about succession planning for every position and focus on developing future leaders — it’s imperative to have a sense for who is likely to be the next chief merchant or CTO.”
Which traits, skills and abilities are most important in a retail CEO today? Les Berglass, founder and CEO of Berglass + Associates, a New York-based executive search firm specializing in retail and consumer goods, says the core characteristics of CEO success haven’t changed: “Leaders have to know how to make money and increase shareholder value. Profitability remains the backbone of their responsibility.”
Still, he insists that today’s retail CEOs have to be equally adept at picking people as they are at picking product.
The top trait Berglass looks for? Whether the candidate has a track record as a talent magnet. “I’m not diminishing the importance of great product, but it’s equally imperative to find someone that other people are dying to work for and who knows how to attract talent. Someone like Mindy Grossman at HSN comes to mind — she picks up the phone and people want to work for her,” he explains.
And talent magnets also “know how to retain talent,” he says. “It’s becomes a case of loyalty born out of mentoring.”
Berglass also looks for leaders who have a passion for consumers, citing Jeff Bezos and Les Wexner as two who are head and shoulders above most. Berglass believes the industry will soon see a handful of future leaders plucked from the marketing discipline, citing these executives as “visionary strategists with a keen understanding of the consumer.”
Likewise, Berglass looks for executives who “engage ideas but don’t marry them. Leaders have to be flexible,” he says. “America is a mature market and the only way to grow a business is to gain share, because you’re not going to grow by adding square footage. The problem is that the battle to increase share is costlier and deadlier.”
Farooq Kathwari, chairman, CEO and president of Ethan Allen Interiors, has held the top spot for 26 years and is only the second CEO in company history. He believes leaders need to constantly challenge themselves and their long-held assumptions. “We ask ourselves over and over, ‘Are we relevant? Do we have a relevant offering and taste level? Are we serving the right demographic?’”
Kathwari thinks of himself as the captain of a sports team — very much in the game. “The CEO shouldn’t be on the sidelines,” he says. “They have to participate, listen and encourage the sharing of ideas, because the best ones often result from a collaborative approach where everyone is invested in the outcome.”
Ethan Allen executives are measured by how well they adhere to 10 leadership principles created by Kathwari. The hardest one, he says, is justice. “A successful leader must always make decisions fairly. Justice builds confidence and trust, which in turn encourages motivation and teamwork.”
Yvonne Sell, director of Hay Group’s leadership and talent practice for the United Kingdom and Ireland, recently authored the company’s book, Leadership 2030, which analyzes what’s driving business change, what the future might look like and how CEOs will need to respond.
Culled from three years of research, the book pinpoints six global megatrends likely to bring about deep-seated change. Sell, who defines megatrends as “long-term, transformational processes with global reach, broad scope and dramatic impact,” believes they will have far-reaching implications for the next generation of retail CEOs. The megatrends are:
- Globalization 2.0 — marking the shift in economic power from West to East. It is creating a new global middle class, fragmenting markets and intensifying competition.
- Environmental crisis — a combination of climate change and the growing shortage of natural resources. Sell expects this megatrend to push sustainability to the top of the corporate agenda.
- Individualism and value pluralism — the upshot of the freedom of choice that comes with growing affluence. This “everyone gets what they want” mindset erodes customer and employee loyalty and turns workplace motivation on its head.
- Digitalization — blurring the boundaries between private and professional life, as work and the workplace go remote.
- Demographic change — an aging world population is reshaping the global workforce and intensifying the war for talent.
- Technological convergence — whereby disciplines like nanotechnology, biotechnology, information technologies and cognitive science applications come together, netting potent innovations that promise to transform everyday life.
Sell suggests that changes of this magnitude will require a different kind of leadership in the not-too-distant future. CEOs “will be tasked with generating loyalty among increasingly diverse, independent and remote teams. They will need to relinquish personal power in favor of collaboration.”
How to Measure Success
Performance matters in business and, not surprisingly, it can have a direct correlation to CEO tenure.
Based on the findings of STORES/Hay Group research, however, it’s impossible to say for certain whether longer CEO tenure leads to stronger total shareholder value or, conversely, if strong total shareholder return and earnings per share results lead to longer CEO tenure.
Among the 17 executives who have been at the helm for 15 years or more, 10 have managed to increase both total shareholder return and earnings per share over the last three years.
Eight companies — Foot Locker, Haverty Furniture, Macy’s, O’Reilly Automotive, Oxford Industries, Signet Jewelers, Under Armour and VF Corp. — posted three-year averages of at least 25 percent in both TSR and EPS, but here again it’s difficult to establish a connection to CEO tenure.
Distilling the figures a bit differently — combining TSR and EPS averages — yields yet another view of CEO performance from an investor’s viewpoint. Using this admittedly unscientific metric, one could conclude that Foot Locker’s Kenneth Hicks (five years), William McGill of Marinemax (16 years) and Clarence Smith of Haverty Furniture (11 years) are the top-performing retail CEOs.
While TSR is generally considered the most popular gauge of CEO and corporate performance, EPS is rising in popularity. This may be due to the fact that EPS figures are clearly defined, whereas TSR can be subject to tweaking.
While it would be easier to recognize trends in tenure and its relationship to company performance if retail was strictly based on science, it is clearly an amalgam of art and science and thus more difficult to categorize. Successful CEOs endeavor to make well-informed decisions that will generate positive results for both the company and its shareholders. Those decisions are the byproduct of experience, knowledge and resolve — and are not always reflective of tenure.