He’s Making a List: Tuck Professor Highlights Best, Worst CEOs of the Year

Sunday, December 21, 2014
Hanover — What do Dick Costolo of Twitter, Eddie Lampert of Sears Holdings, Philip Clarke of Tesco, Dov Charney of American Apparel and Ricardo Salgado of Banco Espirito Santo, have in common?

They’re all corporate chieftains, right? Well, yes. They are also, according to Sydney Finkelstein, who teaches management at Dartmouth College’s Tuck School of Business, the five worst CEOs of the year.

Welcome to the club, guys.

The business press loves heroes and is rife with “best CEO” lists — Harvard Business Review, Forbes and Barron’s have all been annually compiling and publishing such lists for years. That’s because big business, like professional sports, is all about celebrating winners. In order to learn how to manage for success, the conventional wisdom goes, study what successful business leaders have done.

But five years ago Finkelstein had a contrarian idea: Study failure. The lesson become a teaching tool to help his students “learn from others’ mistakes,” he said. So Finkelstein began compiling an annual roster of the five worst-performing corporate executives in the world and, more important, explaining what they did wrong — sometimes colossally wrong — to earn their place on the list.

Over the years, companies whose CEOs have been awarded one of Finkelstein’s laurels include electronics retailer Best Buy, beauty products seller Avon, Blackberry maker Research in Motion and home video giant NetFlix (in the worst category) and online retailer Amazon, luxury designer Michael Kors and Netflix (in the best category).

Yes, it’s possible to swing from worst-to-first. Netflix CEO Reed Hastings’ decision in 2011 to split the DVD-through-the-mail side of the business from the online streaming side of the business and raise prices at the same time triggered a huge backlash among customers and was considered the biggest marketing blunder since New Coke flopped. But Hastings’ quick decision to own up to the miscalculation, coupled with Netflix’s bold entry into original programming with new episodes of House of Cards, helped to send the stock up 300 percent, inspiring Finkelstein to rank him as one of the best CEOs in 2013.

Not surprisingly, the worst CEO designation is not distinction that CEOs covet. In 2013, when former Microsoft CEO Steve Ballmer was named by Finkelstein as one of the poorest performing executives of the year for not being better able to optimize the assets he took over managing from Bill Gates, a Microsoft representative contacted Finkelstein to let him know the company was “very unhappy,” he said. (A couple of months later, Ballmer announced his retirement — five years ahead schedule.)

Last year, to add balance and to recognize the link between a CEO’s strategy and the company’s success, Finkelstein also offered up his picks for the five best CEOs of the year. The 2014 class of the top five CEO’s includes Andrew Wilson of video game maker Electronic Arts, John Martin of biotech firm Gilead Sciences, Jack Ma of Chinese e-commerce giant Alibaba, Kevin Plank of sportswear apparel designer Under Armour and Elon Musk of electric car manufacturer Tesla and aerospace firm SpaceX.

Finkelstein, the Steven Roth Professor of Management and faculty director of the Center for Leadership and associate dean for executive education at Tuck, is an authority on the management — and mismanagement — of companies: He’s written 17 books on the subject, including the bestseller Why Smart Executives Fail: And What You can Learn from Their Mistakes, a six-year study of 51 companies that includes 200 interviews of business executives and examines how corporate misfires occur and what managers can learn from them in order to prevent repeating the same costly mistakes.

“It really is all about learning,” Finkelstein said of his worst-and-best lists, which, despite the quick-and-lite tone in which they are frequently framed and covered in the media, nonetheless contains serious lessons. “That is what I try to do in the classroom with students and with the executives I coach.”

Like a business school assignment, Finkelstein’s pool of candidates begins with a lot of number crunching: For U.S. companies, the initial field encompasses the 1,000 biggest public companies ranked by revenue. For non-U.S. companies, where reliable data can be harder to collect, he relies more on information from colleagues and other sources, including media coverage, to build a pool of candidates.

Although financial numbers count for a lot, they are not the full equation needed to arrive at a “short list” upon which to select the final five in either the “worst” of “best” categories, Finkelstein said.

“Financial criteria is the first step,” he said, when weighing the relationship between a company’s performance and the leadership of its chief executive. “Then you have to look at what goes on, why and how.” That includes examining the “strategic situation of the company, competitors and corporate governance and ethical issues,” he said, as part of the mix.

With the aid of two Dartmouth undergraduates and a Tuck student, the team trolls reams of data, in addition to weighing the qualitative factors that may not be numerically expressed but which nonetheless are necessary to draw a complete picture of the CEO.

For example, on a strictly data basis, Uber, the smart phone app-based taxi service company sweeping the country and world and whose private market valuation is estimated to be $40 billion, would seem like a slam dunk for the “best CEO” list.

But the company’s cavalier attitude toward privacy and CEO Travis Kalanick’s well-publicized gaffes — he threatened to hire investigators to dig up dirt on journalists who wrote critically about the company — made him a strong candidate for the worst list. (In the end, Kalanick didn’t make it on either list this year.)

While the process of compiling information to make a determination on a CEO is “rigorous,” Finkelstein acknowledged it is also “a subjective list,” as another person might emphasize different criteria by which to assess failure or success.

Nonetheless, Finkelstein’s analysis can sometimes yield some awkward results.

Steven Roth, the Dartmouth and Tuck alumnus and college trustee who endowed Finkelstein’s chair at Tuck, was a director of JCPenney — whose CEO Ron Johnson was ousted in April 2013 after only 17 months on the job over a botched strategy to turn around the struggling retail store chain. Roth resigned his JCPenney board seat in September, 2013, and sold his stake in the company. Three months later Finkelstein selected JCPenney’s Johnson as one of the five worst CEOs of the year.

As one of the country’s most successful commercial real estate developers, Roth likely saw the potential unlocked value of JCPenney’s real estate when he invested in the company and joined the company’s board, Finkelstein said, which was separate from Johnson’s failed turnaround effort.

“I think it’s fair to say that in selecting CEOs for both lists, I focus on my criteria and analysis … and nothing else,” Finkelstein wrote in an email.

John Lippman can be reached at 603-727-3211 or jlippman@vnews.com.

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