By now, most readers of the financial press are familiar with the travails of J.C. Penney, the venerable retailer whose fortunes have of late taken a turn for the worst, in large part due to the interference of activist investor Bill Ackman, CEO of hedge fund Pershing Square Capital Management. Back in late 2010, Ackman began acquiring shares of Penney at an average price of $25; his stake ultimately grew to around 18%, making him the company’s largest shareholder . As a new Board member buoyed with confidence that he alone knew how to return the Company to its former glory, he recruited and convinced his fellow board members to hire Ron Johnson, then head of Apple’s wildly successful retail store business, as CEO.
Although we’ll likely never know what conversations took place between the Board and Johnson before he was hired regarding his strategic vision for revitalizing the Penney brand , it’s likely Ackman threw his 18% ownership weight around and convinced any unbelievers that Johnson was the ideal man for the job. What transpired over the roughly two years before Johnson was unceremoniously fired in April of this year is well known. His strategy of eliminating coupons and other sales promotions resulted in a 25% drop in revenue, the layoff of over 1,000 employees and a death spiral from which the company will likely never recover. Ackman, after trying yet again to convince the Board to do his bidding, quit in a snit and sold all his Penney shares at a loss of over $500 million. In the meantime, the Board, no doubt reflecting on The Who’s “…..meet the new boss, same as the old boss” theme, rehired former CEO Mike Ullman, ostensibly on an interim basis.
What’s particularly interesting about this entire soap opera, at least from a staffing perspective, is the likely influence of what is commonly known as the “halo effect.” This phenomenon, which often transforms otherwise rational executives into starry-eyed optimists, occurs when a well-known and accomplished CEO candidate is introduced to a company’s Board by a key investor or advisor. Wary of being viewed as skeptics of the impact this person is expected to have on the company’s fortunes, Board members are often all too willing to give this type candidate a free pass, rarely subjecting him or her to the interview rigors or due diligence that would otherwise take place with a lesser known candidate.
The result in this case was, unfortunately, all too predictable……Johnson proved to be a poor fit for the company’s culture (for over 100 years, Penney has served a relatively low income customer base) and was forced out at great cost to the company’s brand and financial stability. The lesson for Boards and hiring executives? It pays to look a gift horse in the mouth….you may discover it has no teeth!
