Last week, beleaguered industrial conglomerate 3M (MMM -1.05%) dismissed recently installed Group President and Chief Business and Country Officer Michael Vale due to "inappropriate personal conduct and violation of company policy." Vale was arguably the second-most-important executive at the company, but does his departure significantly impact the investment case for the company?
Who is Michael Vale?
Any attempt to guess the reason for Vale's dismissal is a fruitless exercise. Suffice it to say that 3M said it was "unrelated to the company's operations and financial performance," and he also resigned from his position on the board of directors of outdoor equipment company The Toro Company.
However, there's little doubt that Vale's departure is significant. 3M's operations are structured into four business segments. One of them, healthcare, is set to be spun off by the end of 2023. But the group presidents of the remaining three (safety and industrial group, transportation and electronics group, and consumer group) all reported to Vale. When Vale's promotion to the newly created role was announced -- in conjunction with the company's April 25 earnings report -- it said he would report directly to CEO Mike Roman. And it was clear that the 30-year 3M veteran was a critical part of the company's restructuring plan.
Why Vale mattered to 3M's restructuring plan
One clue as to why Vale's role was set to be pivotal was in his title. Not only was he overseeing the three ongoing business groups as "president and chief business officer," he was also the "country officer." That latter role came with responsibility for "customer operations, country governance, and emerging markets," according to a 3M press release.
Image source: Getty Images.
This matters because the conglomerate has been fundamentally restructuring its operations in recent years and is doing so again. For example, 3M previously changed its operating structure so businesses would be run globally rather than on a country basis.
More restructuring was announced in April, with safety and industrial moving to "a division-led model" with certain area-based group leadership positions eliminated. Transportation and electronics will have "two divisions, further reducing structure," according to Roman. Meanwhile, the consumer group will simplify its market approach with teams focused on core products and brands.
Furthermore, 3M will change the way it goes to the market in about 30 countries (which represent less than 5% of its revenue), moving toward partnering with well-established distributors in those markets.
Vale's role in overseeing country operations would have been pivotal in all these changes. It's not a stretch to argue that he was the key man in the restructuring plan. Given the importance leadership has put on restructuring how 3M goes to market internationally and the operational and personnel, it's highly likely Vale was earmarked to oversee many of the changes.
Notably, instead of eliminating his role in conjunction with his departure, 3M's management is now searching for a replacement -- a tacit implication of Vale's importance to the restructuring plan.
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What it means to investors
Unfortunately, Vale's departure puts more pressure on the conglomerate, not least because many had pinned their hopes on the restructuring plan to turn the company's fortunes around. While many investors focus on the possibility that 3M will face substantial legal liabilities -- and rightly so -- the fact is that 3M has underperformed operationally as well. And a combination of mediocre growth, deteriorating margins (see chart above), and consistently missed guidance is not a recipe for long-term success.
Vale's removal also creates something of a leadership vacuum at 3M, as he may have been perceived as a candidate to succeed Roman as CEO. On the other hand, appointing a heavyweight industrial executive handpicked by an actively involved board could hugely benefit the company's current and future restructuring efforts. The company's choice to fill Vale's role will be something investors should look out for in the coming months, because this will be a crucial appointment for 3M and its shareholders.
