Apple's problem? Its board and Wall Street
It’s human nature to blame the CEO when a company’s fortunes take a turn for the worse. But that doesn’t mean he’s the real source of the company’s woes or that replacing him will improve its prospects.
Take Apple (AAPL), whose stock shed a third of its value from its high of last summer to its early-May low. Given slowing iPhone sales and the absence of any new blockbuster product on the horizon, it was just a matter of time before calls for CEO Tim Cook’s resignation began to emerge. One proposal that has received favorable mention among at least some Apple investors calls for the company to acquire Tesla — the electric carmaker that strikes many as having captured the innovative spirit of the Apple of old — and appoint its superstar CEO Elon Musk to become the leader of the combined company.
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That would be a dangerous thing to do, according to Gautam Mukunda, a professor of organizational behavior at Harvard Business School and author of the book Indispensable: When Leaders Really Matter. He hastened in an interview to say that this isn’t because he thinks poorly of Musk in particular. However extraordinary Musk is, it’s not clear that he is a good fit for Apple, which is a very different company than Tesla. Mukunda added: “Most of the CEOs who try to radically transform a company will fail.”
The heart of Apple’s problem, in his opinion, is not the identity of its CEO but the company’s unwillingness to resist pressure from Wall Street to focus on short-term performance. “Tim Cook is behaving precisely in the ways that the company’s board and largest shareholders seem to want him to,” Mukunda said. “For example, he’s engaging in financial engineering, like borrowing money in order to repurchase Apple shares, which boosts the stock over the short term but does absolutely nothing to promote the company’s long-term growth.”
“Rather than projecting their frustration onto Cook,” Mukunda continued, “Apple investors should look in the mirror. They are the problem, not Cook, to the extent they insist that Apple focus on short-term performance.” To be sure, that’s a tall order, since that’s asking Apple to battle the now-dominant corporate and economic culture that focuses almost exclusively on short-term results.
But, “without such a shift why would you even want to replace Tim Cook, since he’s doing what you want him to” Mukunda asked?
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Mukunda’s research has implications for investors in companies other than Apple, of course. It means that most of us exaggerate the role of the CEO and therefore pay too much attention to CEO turnover. That doesn’t mean an ailing company’s shares won’t experience a bounce whenever it appoints a new CEO. But Rakesh Khurana, a professor of leadership development also at Harvard Business School, has found that most “stock-price run-ups after the announcements of CEO turnover are short-lived.”
In any case, Mukunda continued, it would be the height of folly to judge a company according to short-term stock price fluctuations. “Just take how Wall Street reacted when Steve Jobs first announced the iPod. Though that product proved to be the precursor of the product line that transformed Apple into the most successful growth company of the modern era, Apple’s stock dropped that year.”
The bottom line? If we really desire a company to change course, we should focus on changing the incentives under which CEOs operate rather than take the easy way out and blame them for doing what their bosses — their boards of directors — are pressuring them to do.
Mark Hulbert, founder of the Hulbert Financial Digest, has been tracking investment advisers' performances for four decades. For more information, email him atmark@hulbertratings.com or go towww.hulbertratings.com.