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Why New CEOs Sometimes Bring New Problems

Leadership transitions are ripe with opportunity—and fraught with peril.

(originally published by Booz & Company)

Johnson & Johnson is in the news again, this time for paying a US$2.2 billion settlement with regard to accusations of improperly promoting an anti-psychotic drug. It seems like every year or so, J&J is involved in some product recall (when not being taken to task for one regulatory violation or another). These recurring problems are noteworthy not because J&J’s behavior is worse than that of its competitors, but because they are occurring at a company that once set the gold standard for corporate virtue. J&J’s handling of the 1982 Tylenol poisonings still stands as the textbook example of corporate crisis management and social responsibility. So how could the company have fallen from “best in class” to “also ran”?

The surprising answer is found in the natural tendency of leaders to want to distinguish themselves from their successful predecessors. James Burke, J&J’s CEO during the Tylenol crisis, came as close to being hailed a public hero as any corporate chief in modern times. He was articulate, candid, and ethical. Among other things, Burke expanded the J&J’s “Credo Challenge,” a company-wide effort to reinforce the famous credo that had been introduced in the 1940s by the highly respected CEO General Robert Wood Johnson. The credo is one of the foundation documents of corporate social responsibility, and under Burke’s watch, it was a critical part of the company’s culture, through annual exercises like the “Credo Challenge.” Those exercises created the conditions under which everyone at J&J was prepared to do the right thing when the Tylenol poisonings occurred.

Alas, Burke’s successor was destined to appear small in comparison. How then could that new CEO make his own mark? Apparently with something—anything!—different from what Burke did. In the name of saving money, he cut the “Credo Challenge.” Burke’s ego-threatened successors even destroyed corporate training videos documenting how Burke and his team had prepped the company to respond appropriately to the needs of its stakeholders.

It’s a common pattern. When Harold Williams retired as head of the Getty Trust, the museum was widely seen as being among the world’s up-and-coming arts institutions. His successor—lacking William’s leadership skills—decided to establish his reputation by fixing what wasn’t broken, firing the museum’s most able executives, and replacing competent board members with individuals loyal to him. As a result, Getty suffered in terms of its reputation, community relations, and finances. It is now known as a museum with a promising future behind it.

Of course, executive transitions are also the most effective way of bringing in new blood and turning unsuccessful organizations around. Ford’s much admired CEO, Allan Mullaly, was recruited from Boeing with the express purpose of sweeping out corporate deadwood and introducing new ideas. In the process, he has undone damage introduced by a previous Ford CEO, Jacques Nasser.

Yet in trying to differentiate themselves, new CEOs often abandon successful strategies, programs, and even organizational missions. At age 40, James Cash Penney retired from running the successful department store chain he had founded and then, over a period of nearly five decades, watched from the boardroom as one CEO after another gradually dismantled the principles and practices that had made JC Penney the nation’s fastest-growing mass retailer. As the company unraveled, Penney frequently found himself casting the only dissenting votes on the board.

In some cases, former CEOs have to come back out of retirement to clean up the mess. Former Corning CEO Jamie Houghton came back to the C-suite when it was clear his successors had lost sight of the profitable path he had pioneered. Similarly, Starbucks’ Howard Schultz un-retired himself as CEO after the company went into a financial nose-dive and rumors of a possible takeover by McDonald’s circulated on Wall Street. In his book, Schultz explained that the company had abandoned the values that once had made it great.

This is something I’ve witnessed firsthand. I serve occasionally in an advisory capacity at a business created with a unique and specific mission. When its founder retired, his successor immediately changed course, entering arenas where he would be credited as personally responsible for any successes achieved. After a brutal board battle, the new CEO was eventually replaced by an individual dedicated to the original purpose of the organization.

What is to be made of this? Although the name of the game of business is change, the trick is for boards to appoint executives who know what to change and what to retain. Boards also have the final responsibility to protect the values, principles, and missions of the organizations they serve. Sometimes that means reining in respect-craving CEOs when they wander afield, desperately searching for trees on which to leave their marks.

James O'Toole

James O’Toole is director of the Neely Center for Ethical Leadership at the University of Southern California’s Marshall School of Business.

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