1 00:00:00,240 --> 00:00:10,280 Speaker 1: Bloomberg Audio Studios, podcasts, radio news. If you've been anywhere 2 00:00:10,320 --> 00:00:13,880 Speaker 1: on the Internet recently, you've probably seen the same viral 3 00:00:14,000 --> 00:00:17,400 Speaker 1: video I have. It's a closeup of a man and 4 00:00:17,440 --> 00:00:21,799 Speaker 1: a woman embracing up on the JumboTron at a Coldplay concert. 5 00:00:22,400 --> 00:00:25,320 Speaker 1: When they find out they're on screen, they panic. 6 00:00:26,600 --> 00:00:27,560 Speaker 2: Or show. 7 00:00:29,480 --> 00:00:32,560 Speaker 1: It was an awkward moment. Once the clip started gaining 8 00:00:32,600 --> 00:00:37,080 Speaker 1: traction online, internet flews discovered it was in fact an affair, 9 00:00:37,720 --> 00:00:42,120 Speaker 1: and they also discovered another awkward ringle. The woman in 10 00:00:42,159 --> 00:00:45,000 Speaker 1: the video was the chief people officer at a data 11 00:00:45,080 --> 00:00:49,200 Speaker 1: technology company called Astronomer, and the man in the video 12 00:00:49,680 --> 00:00:54,720 Speaker 1: was Astronomer's CEO. Well after that video blew up the 13 00:00:54,800 --> 00:00:59,320 Speaker 1: former CEO, just days later, the board accepted the CEO's 14 00:00:59,360 --> 00:01:02,000 Speaker 1: resignation and installed an interim chief. 15 00:01:02,680 --> 00:01:07,520 Speaker 2: In light of the amazingly unique and wild circumstances of 16 00:01:07,640 --> 00:01:11,480 Speaker 2: him being caught with his HR chief at the Coldplay concert, 17 00:01:11,720 --> 00:01:13,280 Speaker 2: he was summarily dismissed. 18 00:01:13,720 --> 00:01:17,679 Speaker 1: Matthew Boyle, Bloomberg's Management and work reporter, says the Astronomer 19 00:01:17,760 --> 00:01:21,560 Speaker 1: leader's ouster might be uniquely dramatic, but it's just the 20 00:01:21,680 --> 00:01:26,520 Speaker 1: latest in a series of CEO departures, terminations, and resignations 21 00:01:26,600 --> 00:01:28,000 Speaker 1: that Bloomberg has been tracking. 22 00:01:28,319 --> 00:01:32,240 Speaker 2: Last year saw a record number of CEOs who not 23 00:01:32,440 --> 00:01:37,400 Speaker 2: just departed big public US companies, but by our determination 24 00:01:37,560 --> 00:01:41,000 Speaker 2: and the determination of an outside expert, were ousted, were 25 00:01:41,040 --> 00:01:42,319 Speaker 2: essentially forced out. 26 00:01:42,680 --> 00:01:47,400 Speaker 1: Matthew's teams spoke with academics, corporate lawyers, executive search advisors, 27 00:01:47,440 --> 00:01:51,880 Speaker 1: and public relations experts, and partnered with compensation consulting firm 28 00:01:52,000 --> 00:01:56,400 Speaker 1: Ferry and Advisors to analyze CEO departures at some of 29 00:01:56,400 --> 00:01:58,040 Speaker 1: the world's biggest companies. 30 00:01:58,360 --> 00:02:01,520 Speaker 2: There were one hundred and thirty four forceouts in twenty 31 00:02:01,600 --> 00:02:04,720 Speaker 2: twenty four, including some very big companies we all know. 32 00:02:05,080 --> 00:02:08,359 Speaker 2: Nike was one. Just do It, the world's largest athletic 33 00:02:08,400 --> 00:02:12,680 Speaker 2: clothing company, is doing a leadership change. Starbucks was another. 34 00:02:12,880 --> 00:02:17,800 Speaker 2: Starbucks shook the restaurant industry by replacing CEO Laxman Narrisimhand 35 00:02:17,880 --> 00:02:22,799 Speaker 2: with Brian Nickel. Intel, CEO of Intel is out, Petco, 36 00:02:23,120 --> 00:02:27,760 Speaker 2: Victoria's Secret Peloton. These are all companies that decided that 37 00:02:27,800 --> 00:02:30,519 Speaker 2: they were not happy with their current CEO, and the 38 00:02:30,639 --> 00:02:33,880 Speaker 2: question I was seeking to answer was what is this costs? 39 00:02:34,720 --> 00:02:39,480 Speaker 1: The answer a whole lot variant found that to force 40 00:02:39,480 --> 00:02:43,400 Speaker 1: out these CEOs, companies paid a median of three point 41 00:02:43,480 --> 00:02:47,480 Speaker 1: one million dollars in cash, and for companies paying equity, 42 00:02:47,919 --> 00:02:50,520 Speaker 1: a median of six point two million dollars. 43 00:02:51,480 --> 00:02:53,320 Speaker 2: What is this cost to get rid of the CEO 44 00:02:53,360 --> 00:02:55,720 Speaker 2: you don't like? What does it cost to recruit the 45 00:02:55,800 --> 00:02:59,080 Speaker 2: new savior CEO who you really do want? What about 46 00:02:59,120 --> 00:03:01,400 Speaker 2: the lawyers and the PR people, and what about the 47 00:03:01,480 --> 00:03:05,000 Speaker 2: search firms that look for the new CEO? What happens 48 00:03:05,040 --> 00:03:06,880 Speaker 2: even to employee productivity? 49 00:03:07,160 --> 00:03:10,160 Speaker 1: For Astronomer, It's hard to tally the true cost of 50 00:03:10,200 --> 00:03:13,639 Speaker 1: the CEO's departure, in part because the company is private, 51 00:03:14,240 --> 00:03:17,360 Speaker 1: but it's damage control campaign can't have been cheap. 52 00:03:17,720 --> 00:03:19,440 Speaker 2: Hi, I'm Gwyneth Paltrow. 53 00:03:19,960 --> 00:03:23,079 Speaker 1: I've the company hired a crisis PR firm and put 54 00:03:23,080 --> 00:03:26,280 Speaker 1: out a video starring Gwyneth Paltrow, who just happens to 55 00:03:26,320 --> 00:03:29,079 Speaker 1: be the ex wife of Coldplay frontman Chris Martin. 56 00:03:29,560 --> 00:03:31,680 Speaker 2: Thank you for interest in Astronomer. 57 00:03:32,000 --> 00:03:35,040 Speaker 1: We reached out to Paltrow's representatives and her company Goop 58 00:03:35,200 --> 00:03:37,440 Speaker 1: to find out what she made for the ad spot. 59 00:03:37,920 --> 00:03:40,880 Speaker 1: As of this recording, we haven't heard back, but her 60 00:03:40,880 --> 00:03:44,360 Speaker 1: biographer told Us Weekly that t was likely paid millions 61 00:03:44,400 --> 00:03:48,880 Speaker 1: based on previous appearances millions for a one minute ad. 62 00:03:50,880 --> 00:03:53,160 Speaker 1: I'm Sarah Holder, and this is the big take from 63 00:03:53,200 --> 00:03:56,920 Speaker 1: Bloomberg News Today on the show, why it's so expensive 64 00:03:57,000 --> 00:04:00,760 Speaker 1: to replace the CEO and how those costs down to 65 00:04:00,800 --> 00:04:09,960 Speaker 1: the rest of us. It probably won't surprise you to 66 00:04:10,000 --> 00:04:14,880 Speaker 1: hear that American CEOs get paid a lot. Last year, 67 00:04:15,200 --> 00:04:18,520 Speaker 1: media and compensation for the one hundred highest paid CEOs 68 00:04:18,560 --> 00:04:22,880 Speaker 1: at public companies was nearly thirty one million dollars, according 69 00:04:22,920 --> 00:04:27,080 Speaker 1: to the pay consultant Equilar. The high pay also comes 70 00:04:27,080 --> 00:04:30,839 Speaker 1: with higher pressure to perform, and Bloomberg's Management and Work 71 00:04:30,880 --> 00:04:34,960 Speaker 1: reporter Matthew Boyle says last year a surprising number of 72 00:04:35,000 --> 00:04:38,480 Speaker 1: CEOs were shown the exit twenty. 73 00:04:38,279 --> 00:04:42,000 Speaker 2: Twenty four was a record figure. And is that because 74 00:04:42,040 --> 00:04:45,960 Speaker 2: there is more scrutiny on CEOs these days, not just 75 00:04:46,040 --> 00:04:49,839 Speaker 2: around maybe performance, but around, you know, what they're saying 76 00:04:49,880 --> 00:04:53,039 Speaker 2: on perhaps other issues. I think there's also been a 77 00:04:53,240 --> 00:04:57,640 Speaker 2: rush of CEOs to either leave voluntarily or involuntarily, because 78 00:04:57,720 --> 00:05:00,839 Speaker 2: during COVID, a lot of CEOs stuck around just saying, 79 00:05:01,040 --> 00:05:02,920 Speaker 2: I'm just going to get our company through COVID. Let's 80 00:05:02,960 --> 00:05:05,040 Speaker 2: just get through COVID and now it's time to hang 81 00:05:05,080 --> 00:05:07,279 Speaker 2: it up. Or they got their company through COVID and 82 00:05:07,279 --> 00:05:09,080 Speaker 2: now they look at Trump two point zero and they say, oh, 83 00:05:09,120 --> 00:05:11,560 Speaker 2: my goodness, I can't handle this as well. But also 84 00:05:11,640 --> 00:05:13,560 Speaker 2: a lot of these are just performance issues. I mean 85 00:05:13,560 --> 00:05:17,880 Speaker 2: they are underperforming. They were either chosen poorly or they 86 00:05:17,880 --> 00:05:19,880 Speaker 2: were not the right person at the right time. And 87 00:05:19,920 --> 00:05:21,960 Speaker 2: so when we saw that number one hundred and thirty four, 88 00:05:22,000 --> 00:05:24,080 Speaker 2: we said, my goodness, we need to take a look 89 00:05:24,120 --> 00:05:26,839 Speaker 2: at what's going on here. And twenty twenty five, the 90 00:05:26,880 --> 00:05:29,320 Speaker 2: current year, we're also on pace for a new record 91 00:05:29,360 --> 00:05:32,680 Speaker 2: as well in terms of the number of CEOs ousted already, yes, 92 00:05:32,760 --> 00:05:35,200 Speaker 2: already for the half year, so it could be another 93 00:05:35,240 --> 00:05:35,760 Speaker 2: record year. 94 00:05:35,800 --> 00:05:38,120 Speaker 1: Actually, well, let's start to break down some of the 95 00:05:38,120 --> 00:05:41,800 Speaker 1: costs that you dug into. First, there's the cost of 96 00:05:42,279 --> 00:05:45,920 Speaker 1: just getting rid of someone for cause, not for cause. 97 00:05:46,320 --> 00:05:49,240 Speaker 1: How are those kinds of payments structured. 98 00:05:49,560 --> 00:05:53,920 Speaker 2: Usually it's a set of payments where sometimes they will 99 00:05:53,960 --> 00:05:57,560 Speaker 2: pay their salary for the remainder of the year, even 100 00:05:57,920 --> 00:06:02,640 Speaker 2: for an additional year some type of cash bonus. So 101 00:06:02,720 --> 00:06:05,440 Speaker 2: let's say he was there for half of the fiscal 102 00:06:05,520 --> 00:06:08,440 Speaker 2: year and then was terminated, he might still get a 103 00:06:08,480 --> 00:06:10,920 Speaker 2: bonus for that year, which makes you kind of scratch 104 00:06:10,960 --> 00:06:12,720 Speaker 2: your head, what wait, you fired him, Why is he 105 00:06:12,839 --> 00:06:13,680 Speaker 2: or she getting a bonus? 106 00:06:14,080 --> 00:06:15,880 Speaker 1: Pro rated bonus is kind of crazy. 107 00:06:16,000 --> 00:06:18,960 Speaker 2: Yeah again, rules are different for CEOs, so they're going 108 00:06:19,000 --> 00:06:22,240 Speaker 2: to get some type of pro rated bonus for the 109 00:06:22,360 --> 00:06:24,640 Speaker 2: for the current year. But then where it gets really 110 00:06:24,640 --> 00:06:27,280 Speaker 2: interesting and the numbers start to get really bigger is 111 00:06:27,320 --> 00:06:30,200 Speaker 2: the equity. And these could be in the form and 112 00:06:30,240 --> 00:06:33,600 Speaker 2: I know these terms are arcane, but restricted stock units, 113 00:06:33,680 --> 00:06:38,719 Speaker 2: performance stock units RSUs, PSUs, stock options as well. There's 114 00:06:38,760 --> 00:06:41,960 Speaker 2: a million different flavors of equity and the basic way 115 00:06:41,960 --> 00:06:43,640 Speaker 2: to break it down is some of them you'll just 116 00:06:43,680 --> 00:06:46,080 Speaker 2: get for hanging around. They're time based, you know, they 117 00:06:46,080 --> 00:06:49,760 Speaker 2: will eventually vest over time. Some of them are performance based. 118 00:06:49,800 --> 00:06:52,080 Speaker 2: They're tied to some sort of metric that you do 119 00:06:52,160 --> 00:06:54,800 Speaker 2: have to hit. But my point is when these CEOs 120 00:06:54,839 --> 00:06:58,240 Speaker 2: are terminated again, in three quarters of the companies we 121 00:06:58,320 --> 00:07:01,640 Speaker 2: looked at, there was some sort of accelerated vesting, which 122 00:07:01,680 --> 00:07:04,200 Speaker 2: means those shares that you were going to have to 123 00:07:04,240 --> 00:07:07,320 Speaker 2: wait five years for they're all yours now. For example, 124 00:07:07,360 --> 00:07:10,480 Speaker 2: the Starbucks CEO, we still don't know the final value 125 00:07:10,680 --> 00:07:14,120 Speaker 2: of his severance because it is based on pro rated 126 00:07:14,560 --> 00:07:18,680 Speaker 2: payments that are tied to the company's current fiscal year 127 00:07:19,160 --> 00:07:23,160 Speaker 2: and next fiscal year. He might get paid something for 128 00:07:23,320 --> 00:07:26,880 Speaker 2: the performance of Starbucks, like two years after he left. 129 00:07:27,240 --> 00:07:31,200 Speaker 1: Can you say more about the ousted Starbucks CEO? Was 130 00:07:31,600 --> 00:07:35,040 Speaker 1: his pay package and his exit package on the high side. 131 00:07:35,240 --> 00:07:37,480 Speaker 2: It was on the high side and in both cases, 132 00:07:37,480 --> 00:07:40,960 Speaker 2: and by that I mean the severance of Laxman Harasimam 133 00:07:41,240 --> 00:07:44,800 Speaker 2: was extraordinarily high among the companies we looked at, and 134 00:07:44,880 --> 00:07:48,640 Speaker 2: the payment to the incoming CEO, Brian Nickel was one 135 00:07:48,640 --> 00:07:52,440 Speaker 2: of the highest we have ever seen. He got ninety 136 00:07:52,840 --> 00:07:56,600 Speaker 2: million dollars, ten million dollars and sign on payments and 137 00:07:56,680 --> 00:08:00,760 Speaker 2: eighty million dollars in equity just for coming in the door. 138 00:08:01,000 --> 00:08:03,400 Speaker 2: And that gets into this whole area of what we 139 00:08:03,440 --> 00:08:06,520 Speaker 2: call make whole payments. The reason that number is so 140 00:08:06,680 --> 00:08:10,320 Speaker 2: big is because Brian Nicol was doing a very very 141 00:08:10,320 --> 00:08:13,400 Speaker 2: good job at his previous employer, Chippotle, and he was 142 00:08:13,440 --> 00:08:18,480 Speaker 2: getting this money at Chippotle for extraordinarily good performance. So Starbucks, 143 00:08:18,480 --> 00:08:21,600 Speaker 2: in order to wrench him out of Chipotle, basically had 144 00:08:21,640 --> 00:08:23,520 Speaker 2: to say we have to match that. 145 00:08:23,800 --> 00:08:27,280 Speaker 1: In a statement, A Starbucks spokesperson told Bloomberg, we brought 146 00:08:27,320 --> 00:08:29,920 Speaker 1: in a proven leader with a strong track record to 147 00:08:30,000 --> 00:08:33,439 Speaker 1: set Starbucks up for success and create long term value 148 00:08:33,559 --> 00:08:37,400 Speaker 1: for all stakeholders. He's backed by an experienced team, and 149 00:08:37,520 --> 00:08:40,959 Speaker 1: much of his compensation is tied to future financial performance. 150 00:08:41,880 --> 00:08:46,040 Speaker 1: Let's talk about maybe a more average company trying to 151 00:08:46,080 --> 00:08:48,520 Speaker 1: poach a new CEO or a new CEO. What are 152 00:08:48,520 --> 00:08:51,640 Speaker 1: some of the typical costs that go into that. 153 00:08:52,040 --> 00:08:55,360 Speaker 2: For a more typical CEO, you're usually hiring a search firm. 154 00:08:55,559 --> 00:08:58,640 Speaker 2: Corn Ferry and Spencer Stewart are two of the better 155 00:08:58,720 --> 00:09:02,480 Speaker 2: known ones. You are going to pay that search firm, though, 156 00:09:02,559 --> 00:09:08,000 Speaker 2: usually one third of the new CEO's first year payments 157 00:09:08,120 --> 00:09:10,680 Speaker 2: first year compensation, and that could be a million bucks. 158 00:09:10,720 --> 00:09:13,880 Speaker 2: It could be up to five million dollars in some cases, 159 00:09:13,920 --> 00:09:16,959 Speaker 2: so it is not chump change. But that's only the beginning. 160 00:09:17,120 --> 00:09:20,240 Speaker 2: There are compensation consultants, and then you have all these 161 00:09:20,280 --> 00:09:23,559 Speaker 2: other advisors. You need to pay PR consultants to sort 162 00:09:23,559 --> 00:09:26,440 Speaker 2: of spin the departure because this has to be spun. 163 00:09:27,080 --> 00:09:30,480 Speaker 2: Lawyers as well. PR people. Really good ones can cost 164 00:09:30,480 --> 00:09:33,240 Speaker 2: one thousand dollars an hour. Really good lawyers can cost 165 00:09:33,280 --> 00:09:36,840 Speaker 2: two thousand dollars an hour to negotiate all the disclosures 166 00:09:36,880 --> 00:09:39,839 Speaker 2: and filings you have to do to negotiate and hammer 167 00:09:39,880 --> 00:09:43,320 Speaker 2: out the contract for the outgoing CEO and the incoming CEO. 168 00:09:43,679 --> 00:09:47,200 Speaker 1: You know, the Astronomer team hired the crisis PR firm 169 00:09:47,280 --> 00:09:49,880 Speaker 1: behind Blake Lively's PR. 170 00:09:50,280 --> 00:09:53,560 Speaker 2: Can't probably not an expense they were expecting to have 171 00:09:53,600 --> 00:09:56,120 Speaker 2: in their twenty twenty five fiscal year. But here we are. 172 00:09:56,800 --> 00:09:59,400 Speaker 2: But one big cost that I didn't expect when I 173 00:09:59,400 --> 00:10:02,760 Speaker 2: started doing reporting, but that does come into play is 174 00:10:02,920 --> 00:10:05,880 Speaker 2: that the new CEO is probably going to want other 175 00:10:05,960 --> 00:10:08,920 Speaker 2: new people around him or her. So what we often 176 00:10:08,960 --> 00:10:12,120 Speaker 2: see is that what we call the c suite, the 177 00:10:12,120 --> 00:10:16,280 Speaker 2: executive leadership of a company will usually have other departures 178 00:10:16,679 --> 00:10:20,800 Speaker 2: and arrivals after the new CEO comes in. So Starbucks 179 00:10:20,840 --> 00:10:24,400 Speaker 2: brought in a new CFO, Chief Financial Officer, Kathy Smith, 180 00:10:24,559 --> 00:10:29,040 Speaker 2: highly regarded CFO. She received eleven point four million to 181 00:10:29,160 --> 00:10:32,720 Speaker 2: come on board again, just her sign on and what 182 00:10:32,760 --> 00:10:35,079 Speaker 2: we call the make whole payments. Because she was earning 183 00:10:35,120 --> 00:10:37,640 Speaker 2: a lot at her last job. You got to pay 184 00:10:37,679 --> 00:10:39,800 Speaker 2: the piper to get her into this new job. So 185 00:10:39,800 --> 00:10:42,839 Speaker 2: Starbucks wanted her though Brian Nickel wanted her. That's what 186 00:10:43,080 --> 00:10:44,319 Speaker 2: she got, and. 187 00:10:44,280 --> 00:10:46,000 Speaker 1: Then they had to push out the old CFO. 188 00:10:46,280 --> 00:10:48,520 Speaker 2: You say bye bye to that person. Guess what that's 189 00:10:48,520 --> 00:10:52,120 Speaker 2: a seference cost. And meanwhile, the other executives at the 190 00:10:52,160 --> 00:10:54,920 Speaker 2: company are getting very nervous because a new CEO is 191 00:10:54,960 --> 00:10:57,640 Speaker 2: coming in and they're worried. And there's usually some type 192 00:10:57,640 --> 00:11:01,439 Speaker 2: of interregnum period where there is no CEO, certain executives 193 00:11:01,480 --> 00:11:04,040 Speaker 2: are brought on as what we call an interim CEO. 194 00:11:04,440 --> 00:11:06,840 Speaker 2: Let's say you take the chief operating officer and say, 195 00:11:06,960 --> 00:11:09,480 Speaker 2: you know, look, look Laura, we just need you for 196 00:11:09,559 --> 00:11:11,880 Speaker 2: six months just to like steer the ship, keep the 197 00:11:11,920 --> 00:11:14,120 Speaker 2: trains running on time, and we're going to give you 198 00:11:14,480 --> 00:11:17,559 Speaker 2: one point two million dollars as a retention bonus. 199 00:11:17,800 --> 00:11:19,360 Speaker 1: Sounds pretty good, not a bad. 200 00:11:19,240 --> 00:11:23,160 Speaker 2: Deal, Yeah, And sometimes they backfire because the executives who 201 00:11:23,240 --> 00:11:26,560 Speaker 2: get paid the bonuses are not retained. They leave either 202 00:11:26,640 --> 00:11:31,520 Speaker 2: voluntarily or involuntarily. Later, more severance, more recruitment costs. It 203 00:11:31,600 --> 00:11:34,319 Speaker 2: just keeps adding and adding, which was just so fascinating 204 00:11:34,320 --> 00:11:35,880 Speaker 2: to me. I was like, my god, when does this 205 00:11:35,920 --> 00:11:36,400 Speaker 2: ever end. 206 00:11:37,040 --> 00:11:39,760 Speaker 1: So that's how the costs to push out a CEO 207 00:11:39,800 --> 00:11:43,600 Speaker 1: can spiral. But how does all this tummult impact all 208 00:11:43,640 --> 00:11:46,559 Speaker 1: the people who work at and invest in these companies? 209 00:11:47,200 --> 00:11:57,280 Speaker 1: That's after the break. It sounds like everyone in the 210 00:11:57,280 --> 00:12:01,480 Speaker 1: c suite makes money when CEOs are replaced, the outgoing CEO, 211 00:12:01,840 --> 00:12:06,800 Speaker 1: the incoming CEO, other executives, But for everyone else, dealing 212 00:12:06,840 --> 00:12:10,080 Speaker 1: with a leadership transition can be stressful. You might have 213 00:12:10,120 --> 00:12:12,440 Speaker 1: a new boss, Your boss might have a new boss. 214 00:12:13,040 --> 00:12:16,480 Speaker 1: I asked Bloomberg's Management and Work reporter Matthew Boyle how 215 00:12:16,520 --> 00:12:20,440 Speaker 1: the drama associated with the CEO leaving can impact all 216 00:12:20,440 --> 00:12:22,680 Speaker 1: the other people left working at the company. 217 00:12:22,960 --> 00:12:25,040 Speaker 2: People get very nervous. Am I going to have a 218 00:12:25,080 --> 00:12:26,840 Speaker 2: new boss? Am I going to have a new job? 219 00:12:27,120 --> 00:12:29,120 Speaker 2: Is there going to be a layoff? Are they going 220 00:12:29,160 --> 00:12:31,800 Speaker 2: to bring in the McKinsey consultants and start to do 221 00:12:31,880 --> 00:12:33,400 Speaker 2: some big sort of strategy overhaul? 222 00:12:33,480 --> 00:12:35,120 Speaker 1: Are we taking things in a different direction? 223 00:12:35,240 --> 00:12:37,880 Speaker 2: Exactly? Exactly, so, you certainly are going to have a 224 00:12:37,960 --> 00:12:41,880 Speaker 2: hit to productivity and possibly an increase in your voluntary 225 00:12:41,920 --> 00:12:44,880 Speaker 2: turnover when you have a CEO changeover like this. 226 00:12:45,320 --> 00:12:47,440 Speaker 1: Well, there's a final category of costs that we haven't 227 00:12:47,480 --> 00:12:52,280 Speaker 1: talked about yet, which is shareholder value. If you boot 228 00:12:52,360 --> 00:12:54,960 Speaker 1: your CEO your stock can drop. Obviously, the hope is 229 00:12:55,000 --> 00:12:58,120 Speaker 1: that you're going to turn things around. The stocks will 230 00:12:58,360 --> 00:13:03,360 Speaker 1: rise eventually. Changing leadership will reasure investors. But what did 231 00:13:03,360 --> 00:13:05,040 Speaker 1: you find when you looked at the hit to stock 232 00:13:05,080 --> 00:13:08,120 Speaker 1: price during these transition periods and in the periods thereafter. 233 00:13:08,320 --> 00:13:11,680 Speaker 2: The day Brian Nicol was announced as the new CEO, 234 00:13:12,000 --> 00:13:14,480 Speaker 2: the stock jumped. It was like, oh, my goodness, they 235 00:13:14,600 --> 00:13:17,720 Speaker 2: found this rock star. The shares rose twenty three some 236 00:13:17,840 --> 00:13:18,440 Speaker 2: odd percent. 237 00:13:18,760 --> 00:13:20,440 Speaker 1: We're going to be Chipotle exactly. 238 00:13:20,760 --> 00:13:25,600 Speaker 2: Everything's awesome. What was lost in that analysis The shares 239 00:13:25,600 --> 00:13:28,120 Speaker 2: had fallen twenty five percent in the twelve months leading 240 00:13:28,160 --> 00:13:30,560 Speaker 2: up to that. So guess what, it's a wash. So 241 00:13:30,600 --> 00:13:33,200 Speaker 2: you have to look at the full period, not just 242 00:13:33,240 --> 00:13:36,040 Speaker 2: the one day stock jump on the day that the 243 00:13:36,080 --> 00:13:37,800 Speaker 2: new savior CEO is announced. 244 00:13:38,640 --> 00:13:41,680 Speaker 1: There hasn't been much research looking deeply at this question. 245 00:13:42,200 --> 00:13:44,520 Speaker 1: The last data Matthew could find comes from a twenty 246 00:13:44,600 --> 00:13:49,440 Speaker 1: fifteen study by PwC, which analyzed CEO transitions at twenty 247 00:13:49,440 --> 00:13:53,240 Speaker 1: five hundred companies across three years. By looking at the 248 00:13:53,280 --> 00:13:56,920 Speaker 1: median shareholder returns in the year before and after a 249 00:13:57,000 --> 00:14:02,400 Speaker 1: CEO changeup, PwC estimated for the world's largest public companies. 250 00:14:02,800 --> 00:14:06,360 Speaker 1: These kinds of force turnovers cost one point eight billion 251 00:14:06,480 --> 00:14:09,840 Speaker 1: dollars in shareholder value, and that was ten years ago. 252 00:14:10,400 --> 00:14:12,480 Speaker 2: So that is the hit to shareholders, and it really 253 00:14:12,520 --> 00:14:15,559 Speaker 2: speaks to a company should do a better job of 254 00:14:15,679 --> 00:14:17,040 Speaker 2: you know. This is what it all gets to is 255 00:14:17,120 --> 00:14:21,120 Speaker 2: corporate governance and succession planning, and companies need to do 256 00:14:21,160 --> 00:14:24,080 Speaker 2: a much better job of They spend millions on these 257 00:14:24,120 --> 00:14:27,560 Speaker 2: search firms and on succession planning and building up what 258 00:14:27,560 --> 00:14:30,720 Speaker 2: they call their bench, you know, their managers below the CEO, 259 00:14:30,840 --> 00:14:34,680 Speaker 2: who could one day run the show. But oftentimes, as 260 00:14:34,680 --> 00:14:37,720 Speaker 2: we've seen here obviously, with a record number of ousters 261 00:14:37,720 --> 00:14:40,280 Speaker 2: and all these costs flying around, they're not doing a 262 00:14:40,360 --> 00:14:42,640 Speaker 2: very good job of it at the moment. So, you know, 263 00:14:42,720 --> 00:14:45,600 Speaker 2: and that's on the blame goes to the companies, and 264 00:14:45,640 --> 00:14:48,160 Speaker 2: it certainly goes to boards boards of directors as well. 265 00:14:48,240 --> 00:14:50,720 Speaker 1: Are there any examples of companies that have managed to 266 00:14:50,760 --> 00:14:54,520 Speaker 1: replace their CEO in a more cost effective, less disruptive 267 00:14:54,560 --> 00:14:57,080 Speaker 1: way this year? I'm thinking about Warren Buffett actually. 268 00:14:56,800 --> 00:15:00,000 Speaker 2: For example, Yes, I mean, Buffett as usual is an 269 00:15:00,200 --> 00:15:03,080 Speaker 2: icon here and we've all known for years and years. 270 00:15:03,120 --> 00:15:05,400 Speaker 2: It was a bit of a horse race or parlor game. 271 00:15:05,520 --> 00:15:08,160 Speaker 2: You know who was going to be the successor, and 272 00:15:08,200 --> 00:15:11,280 Speaker 2: in the end choosing able right a very smart choice. 273 00:15:11,360 --> 00:15:14,840 Speaker 2: I mean it got resoundingly positive feedback because I think 274 00:15:14,920 --> 00:15:17,760 Speaker 2: Warren had the benefit of time. He is Berkshire Hathaway. 275 00:15:18,040 --> 00:15:20,840 Speaker 2: There was no activist investor banging on the door saying 276 00:15:21,000 --> 00:15:22,960 Speaker 2: we need to know the new who's going to replace 277 00:15:23,000 --> 00:15:25,920 Speaker 2: Warren within six months, or we're going to you know, uh, 278 00:15:26,080 --> 00:15:27,960 Speaker 2: the trust we're going to raise out exactly. He has 279 00:15:28,040 --> 00:15:32,360 Speaker 2: such a reservoir of trust. Few companies have that reservoir 280 00:15:32,440 --> 00:15:34,720 Speaker 2: of trust, I would say in American business right now. 281 00:15:35,200 --> 00:15:38,840 Speaker 1: This is perhaps an obvious question, but if companies are 282 00:15:38,880 --> 00:15:43,960 Speaker 1: spending all this money on CEO transitions, what aren't they 283 00:15:44,000 --> 00:15:46,200 Speaker 1: spending it on. Does this come at the expense of 284 00:15:46,440 --> 00:15:50,960 Speaker 1: employee salaries, investing in new products? How do companies make those. 285 00:15:51,520 --> 00:15:53,600 Speaker 2: It's a really good question, and I think it comes 286 00:15:53,600 --> 00:15:56,160 Speaker 2: at the expense of a lot of different things. If 287 00:15:56,200 --> 00:15:59,240 Speaker 2: you're paying out all this money to the CEO, you 288 00:15:59,320 --> 00:16:01,600 Speaker 2: might not be paying enough for your CFO and the 289 00:16:01,640 --> 00:16:04,640 Speaker 2: other executives. It's certainly kind of coming to cost of 290 00:16:04,720 --> 00:16:07,880 Speaker 2: paying your rank and file employees as well, maybe you're 291 00:16:07,920 --> 00:16:10,840 Speaker 2: cutting the training budget what we call the learning and 292 00:16:10,840 --> 00:16:13,640 Speaker 2: development budgets, so there won't be as many opportunities for 293 00:16:13,760 --> 00:16:17,200 Speaker 2: employees to learn new skills. Let's say in an age 294 00:16:17,240 --> 00:16:20,000 Speaker 2: of AI that's more important than ever. But you're also 295 00:16:20,040 --> 00:16:22,800 Speaker 2: made the good point business opportunities missed when you have 296 00:16:22,920 --> 00:16:25,720 Speaker 2: no CEO or you're looking for a new one. I 297 00:16:25,720 --> 00:16:27,760 Speaker 2: think there are certainly, and many of the people I 298 00:16:27,840 --> 00:16:30,320 Speaker 2: talked to for the story said there is an opportunity 299 00:16:30,400 --> 00:16:32,880 Speaker 2: cost there. You're not launching that new product, you're not 300 00:16:33,120 --> 00:16:35,680 Speaker 2: entering a new market, You're missing out on a potential 301 00:16:35,760 --> 00:16:38,160 Speaker 2: M and a deal you know that would have transformed 302 00:16:38,200 --> 00:16:40,920 Speaker 2: the company. But you are so consumed with this CEO 303 00:16:41,080 --> 00:16:44,840 Speaker 2: changeover that you have blinders on. 304 00:16:44,840 --> 00:16:47,400 Speaker 1: One of the takeaways that I think you've really highlighted 305 00:16:47,680 --> 00:16:51,920 Speaker 1: is it seems like CEOs always make a lot of money, 306 00:16:51,960 --> 00:16:54,360 Speaker 1: even if they screw things up or cost the scandal. 307 00:16:54,440 --> 00:16:57,920 Speaker 1: Is that fair? Like, do CEOs always fail up to 308 00:16:57,960 --> 00:16:59,480 Speaker 1: the tune of millions of dollars? 309 00:16:59,560 --> 00:17:01,560 Speaker 2: Yeah? I mean, I mean there's no other way to 310 00:17:01,600 --> 00:17:04,000 Speaker 2: answer that but to say, yes, they get paid on 311 00:17:04,119 --> 00:17:09,120 Speaker 2: goodly sums. We know CEO pay is just increasing all 312 00:17:09,160 --> 00:17:12,560 Speaker 2: the time. It's like hockey stick growth. So given that 313 00:17:12,640 --> 00:17:15,800 Speaker 2: a lot of these payments are usually based on what 314 00:17:15,920 --> 00:17:18,600 Speaker 2: the CEOs are earning in a given year, we certainly 315 00:17:18,680 --> 00:17:20,399 Speaker 2: know that the cost to get rid of a CEO 316 00:17:20,960 --> 00:17:23,600 Speaker 2: is only increasing. There's no way these things ever go 317 00:17:23,720 --> 00:17:27,119 Speaker 2: down unless you know, CEO pay does not go down. 318 00:17:27,359 --> 00:17:29,959 Speaker 2: The cost of making a mistake with hiring a CEO 319 00:17:30,480 --> 00:17:32,840 Speaker 2: is not going to go down. I mean. An interesting 320 00:17:32,880 --> 00:17:35,199 Speaker 2: thing that's in proxy statements now is what they call 321 00:17:35,240 --> 00:17:37,520 Speaker 2: the CEO pay ratio, where they have to say what 322 00:17:37,560 --> 00:17:40,840 Speaker 2: does the CEO may compare to the media and employee. 323 00:17:41,200 --> 00:17:43,480 Speaker 2: Some of these ratios are like six hundred to one, 324 00:17:43,840 --> 00:17:46,280 Speaker 2: and I know that raises much bigger questions about you know, 325 00:17:46,320 --> 00:17:50,560 Speaker 2: the American worker and wages and unions, you know, and 326 00:17:50,640 --> 00:17:53,160 Speaker 2: all that, But it really just shows that CEO pay 327 00:17:53,520 --> 00:17:57,359 Speaker 2: has been stratospheric for years, and anytime they try to 328 00:17:57,400 --> 00:17:59,960 Speaker 2: rein it in, one of the unintended consequences is they've 329 00:18:00,200 --> 00:18:03,560 Speaker 2: find other workarounds and loopholes and ways to pay them more. 330 00:18:03,920 --> 00:18:06,480 Speaker 2: But whoever is paid, they're going to be getting plenty 331 00:18:06,520 --> 00:18:09,040 Speaker 2: of money. Yes, that's the common denominor here. 332 00:18:09,600 --> 00:18:12,400 Speaker 1: Well, Matthew, thank you so much. This is a great conversation. 333 00:18:12,440 --> 00:18:13,720 Speaker 2: Sure, thanks so much for having me. 334 00:18:20,240 --> 00:18:23,159 Speaker 1: This is the Big Take from Bloomberg News. I'm Sarah Holder. 335 00:18:23,440 --> 00:18:26,040 Speaker 1: To get more from The Big Take and unlimited access 336 00:18:26,080 --> 00:18:29,840 Speaker 1: to all of Bloomberg dot com, subscribe today at Bloomberg 337 00:18:29,880 --> 00:18:33,640 Speaker 1: dot com slash podcast offer. If you liked this episode, 338 00:18:33,760 --> 00:18:36,119 Speaker 1: make sure to follow and review The Big Take wherever 339 00:18:36,160 --> 00:18:38,840 Speaker 1: you listen to podcasts. It helps people find the show. 340 00:18:39,400 --> 00:18:41,720 Speaker 1: Thanks for listening. We'll be back tomorrow.