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Market-Based Solutions to Vital Economic Issues
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Jul 30, 2019

Institute Insights: Boomerang CEOs: What Happens When the CEO Comes Back?

By Kenan Institute Grant Recipient and UNC Kenan-Flagler Ph.D. Candidate Travis Howell

In the spring of 1985, the board of Apple Computer Company made the fateful decision to fire co-founder Steve Jobs. Apple struggled over the next decade, losing much of its market share and dominance in the personal computer industry. In 1996 at the near-collapse of the company, Jobs returned to retake the reins of the company he created. Through a series of brilliant changes and innovations, Jobs helped refocus and rebuild the company until it ultimately became one of the largest and most powerful firms in the world.

Jobs is certainly a unique case – yet, surprisingly, many other large and high-profile firms have turned to former CEOs (often called “boomerang CEOs”) in times of need. For example, Dell, Enron, Google, Twitter, Snapchat, Best Buy, Starbucks, Yahoo, Reddit, Bloomberg, Urban Outfitters, Charles Schwab and others all had former CEOs return to lead their organizations.

There are many reasons to believe that bringing back a former CEO is the best choice. First, boomerang CEOs skip much of the initial learning period that other individuals go through when entering the CEO position. Usually, a new executive must learn all the operational nuances of the new company and gain the specific knowledge and skills that are specific to the CEO position in that particular firm, which can take even experienced executives time to learn. For boomerang CEOs, however, much of this learning period may be eliminated or reduced since the incoming CEO is already familiar with the firm.

Consistent with these arguments, several of the most well-known examples of boomerang CEOs have been highly successful. For example, Howard Schultz returned to Starbucks after an eight-year hiatus. By refocusing on the company’s core principles that had originally made it successful, Shultz was able to help customers and employees fall back in love with Starbucks, leading its share price to more than triple during his second tenure. Similarly, Seagate Technologies’ stock appreciated sharply during Stephen Luczo’s second tenure, placing it among the top five performing stocks in the S&P 500 and earning Luczo an enviable spot on list of best performing CEOs in the world.

However, there are also good reasons to worry about boomerang CEOs. In many cases, they may barely recognize the firm upon returning, as the business will often face conditions that differ dramatically from those during their first stint as CEO. Between the time in which they leave and return, changes may occur in consumer preferences, competitors, suppliers, demographic shifts or changes in the broader economy. Although some boomerang CEOs may be able to adapt to these new challenges, many more may not.

For example, after relinquishing the CEO position for three years, Michael Dell returned to lead his namesake company in 2007. Unable to make the necessary changes to his company, he took his company private six years later after its shares had fallen by an additional 40 percent. Similarly, Paul Allaire returned to lead Xerox in 2000 amidst an onslaught of new challenges and changing market conditions brought on by new digital technologies. Allaire was unable to effectively address these fundamental challenges and changes, and ultimately left in 2001 with the stock down 60 percent from when he returned. Likewise, Steve Ells’ (founder of Chipotle) first stint as CEO was characterized by rapid growth and spectacular success. However, when he returned to lead the company in 2016, the firm was experiencing a series of health scandals and an influx of new competitors and a declining customer base. These conditions proved ill-suited for Ells’ skillset, and he eventually gave up the CEO position a year later acknowledging the need for improvements that he was unable to oversee.

Overall, there have been many high-profile examples of boomerang CEOs being both resounding successes and spectacular failures. So what do the numbers say? Are boomerang CEOs good or bad on average? This is the question we addressed in our study. To do so, we studied a sample of 167 boomerang CEOs on the S&P 1500 index from 1992 to 2017, and compared their tenures to over 6,000 other (non-boomerang) CEOs. What we found was striking – boomerang CEOs performed significantly worse than other types of CEOs. This negative effect was especially strong for boomerang founders, and also when the firm operated in a fast-changing industry in which the knowledge and experience of the boomerang CEO became obsolete more quickly. So, while some of the most well-known boomerang CEOs have been highly successful (e.g., Steve Jobs, Howard Schultz, etc.), the numbers suggest that these highly visible cases are the exception rather than the norm.

In short, businesses should think twice before bringing back a former boss to steady the organization. Although it may appear to be a smart choice in precept, it may be a poor choice in practice as boomerang CEOs will often push the firm backwards rather than moving it forward. The same advice goes to those CEOs who are considering making a comeback and returning to a former firm – it’s hard to stay on top forever, and the best choice may often be to pass the torch on to someone else rather than risk tarnishing your hard-earned legacy.

Read the research paper, here.

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