Do CEO ousters really help performance?

Do CEO ousters really help performance?

It's not good news for industry CEOs lately, primarily Alcatel-Lucent CEO Patricia Russo and Sprint Nextel Chief Executive Gary Forsee. News circulated last week that both leaders are about to get the boot, although Alcatel-Lucent's board says it fully backs Russo, despite being disappointed by the company's performance. Meanwhile, reports have surfaced that Sprint is looking to quietly replace Forsee by December.

Alcatel-Lucent continues to report disappointing earnings, most recently reporting a second-quarter net loss of $460.3 million, compared with a profit of $413 million a year earlier. Revenue fell 3.6 percent to $5.9 billion from $6.15 billion. Sprint has been struggling with churn in its core mobile-phone business, its integration of Nextel and heavy spending on WiMAX.

Both Russo and Forsee will likely be ousted given the fact that both companies' stock surged following the rumors. Most corporations seek to sooth investors' concerns by sacking the CEO and hiring outsiders who promise quick fixes. But according to a recent article in Harvard Business Online, most companies do no better after ousting their CEOs than they did before. (Kmart went bankrupt in 2002 after replacing its CEO with an outsider.) While such firings help in the short-term, they often damage long-term performance, often because boards are in a hurry to replace their CEOs and lack strategic understanding to find the right replacement.

In Sprint's case, Pali Research indicates a new CEO won't save Sprint's 2008 results. "We believe it is already too late for a management change to enable the company to meet 2008 consensus EBITDA estimates and would expect any CEO to lower 2008 guidance substantially," wrote Pali Research analyst Walter Piecyk. "If a new CEO was able to quickly implement improvements in 2008, we estimate the 2009 EBITDA would probably just be returning to 2007 levels."

Still, the revolt from investors is too hard for many boards to ignore. What we'll probably see is new blood and painful cutbacks that will make investors happy for a while--until they see the true health of these businesses.-Lynnette