Few individuals in the business world are irreplaceable, but investors do have a natural bias toward stability at the top of the ladder. A revolving door in the executive suite implies that the folks who have the best view of the whole operation don't like what they see. Hence the disquiet that might arise from these news items from the Fortune 500. First, Tesla (NASDAQ:TSLA) CFO Deepak Ahuja is retiring -- again. His current two-year stint in the role was his second; he came back from a previous retirement after then-CFO Jason Wheeler made an abrupt exit. And if you feel like you've been hearing about a number of high-profile departures from the electric-car maker in the past year, you're not wrong.
Meanwhile, at chipmaker Intel (NASDAQ:INTC), interim CEO Robert Swan -- who had clearly been tasked with holding down the fort while the board looked for a longer-term leader -- will be that leader. What does it mean that the new boss was clearly not the board's first choice? In this segment of the MarketFoolery podcast, host Chris Hill and senior analyst Jim Mueller consider the concerns around these personnel moves and how important the occupants of the C-suite ought to be to investors considering a stock.
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A full transcript follows the video.
This video was recorded on Jan. 31, 2019.
Chris Hill: I mentioned we've got executives in the news this morning. I'm going to ask the dozens of listeners to stick with me for a minute. These are noteworthy announcements, possibly for different reasons, though. Tesla announced their fourth quarter results, and they also sort of threw in at the end there, "Oh, by the way, the CFO is resigning."
Jim Mueller: At the end of the conference call! It's not even in the earnings release!
Hill: This is Deepak Ahuja. If that name is familiar to Tesla shareholders out there, it's because this is the second time he's been CFO, and this is the second time he's resigned. This is not to be confused with last year, when not one but two Chief Accounting Officers resigned, one of whom resigned after being on the job for one month.
The other executive in the news is Bob Swan. Robert Swan. I don't know him at all, so I don't necessarily know him well enough to call him Bob. Interim CEO of Intel who has just been named full-time. They've removed the interim label. The reason this is interesting is because the board of directors had been looking for a replacement, and Swan had been out doing interviews over the last couple of weeks talking about how, "We're going to have a new CEO." And they appeared to have locked in on a candidate, gotten far down the road, and couldn't close the deal for whatever reason. So, Swan, who was the CFO at Intel -- last summer, Brian Krzanich, who was the CEO at Intel, resigned, so they make Swan the interim. And now, he's got the job, because apparently he was doing well enough.
I don't own either of these stocks, and I find both of these stories unsettling.
Mueller: For different reasons, definitely. A little personal history here. My first paid interaction with The Motley Fool, before I became an employee here, was paying for an online seminar called When To Sell. It gave several red flags, half a dozen or so, on when you should really think about selling your stock. And one of those was "sudden resignation in the C-suite." If you look at Tesla -- I did a little digging -- over the past four years, Tesla's had four different CFOs. Actually, two of them were the same person, Ahuja. He was there from 2008 to 2015, from just before they went public to 2015. Jason Wheeler took that job for 14 months, left in early 2017. He announced at the same earnings two years ago that Tesla just had, just before saying, "I'll be here until the 10-K is filed, then, bye." Then, Ahuja came back from retirement to step in, and he's been there for a couple of years now. And now, it's Zach Kirkhorn -- how do you say his last name?
Hill: We'll just call him Zach.
Mueller: Mr. Zach [laughs] is stepping up from, he had a role in finance, but it's escaping me at the moment.
Hill: But this is his first job as a chief financial officer.
Mueller: Yes. And for such a big company, that's kind of scary. And, not only the two chief accounting officers you mentioned, several other high-level managers, the chief human resources officer. That kind of turnover at such a high level, either Musk is really hard to work for, or there's something going on. As an investor, it really makes me leery.
Hill: Yeah. As I said, it's unsettling because, as you've just said, there aren't a lot of reasons for this. If you're looking at the possible reasons for this type of revolving door in the C-suite at Tesla, the menu is not very large.
In the case of Intel, this may be easier to explain away. It's entirely possible that they got a candidate that they really liked, and then they got hung up on the negotiating details, that sort of thing. Still, if you're Swan, you have to feel a little bit like you've been jerked around a little bit, just because you've been out there giving interviews saying, "Hey, the board is going to have a new CEO. We're excited about this. Blah, blah, blah." And then, it's like, "Oh, well, this person didn't want to go to dinner with us. Do you want to go to dinner with us?" Like, he's the clear second choice here.
Mueller: Well, that's curious. What's even curiouser is that, I believe when he was first named interim CEO in a meeting with employees, he said, "I don't want the full-time job." [laughs] At least according to one report from somebody who was there at the meeting. And now, he has it. And he says, "I'm anxious to get going." But, I'm willing to cut Intel a bit more slack. They've had seven CEOs in 50 years. That's a pretty good record. Until last summer, Krzanich, who was basically forced to leave because of some impropriety, breaking one of Intel's internal rules, they'd had a very smooth set of transitions of those CEOs -- entirely, I believe, from the inside. So, between Tesla's CFO thing and Intel's CEO thing, I'm willing to cut Intel more slack than Tesla.
Hill: Yeah, absolutely. Robert Swan, you look at his career, he's been the chief financial officer at, among other places, General Electric and eBay. He's no slouch. I am curious, though, with this as a backdrop, as an analyst, where do executives fall on your list of how you're evaluating a company? When you're looking at a business and thinking to yourself, "do I want to buy shares of this company?," how soon into the process do you start looking at the leadership of the company?
Mueller: It's probably the second or third thing I look at. First thing I look at is the sum of the financial statements, the cash flow statement, the balance sheet. Not so much the income statement. I want to see how cash is flowing through the company and whether they're making it. And, the balance sheet, how stable the company is. If I like that and I like what the company is doing and what it's possible to do, then I look at the management. I want a team that, one, knows what they're doing, and two, has been doing it for a while, or at least has relevant experience. Naming a longtime CFO to a CEO position, that's fine, or a chief operating officer, that's fine.
This also ties into what the board is doing. Part of the board's governance, what they should have, is some sort of succession plan. Not only do CEOs get fired or resign, but they die. McDonald's back in the day, Cantalupo, back in 2004, died of a heart attack all of a sudden after being CEO of McDonald's for less than two years. They had a candidate, a person who was able to step up rather quickly. I ran across another company, Wilhelmsen, which is an international shipping company in Scandinavia. In 1989, they lost the top two layers of management in an airplane crash. It took them a while to recover from that. That's probably more than what you're expecting, but certainly, a board should have some sort of succession plan.
It's the suddenness that I don't like as an analyst. But if it's well planned out and well thought out, and especially if it's telegraphed to the market, then yeah, I'm cool with it.