Leadership is important -- there's no question about it. So when a CEO changes, investors should be paying close attention to the transition. But it isn't always good news when the board makes an abrupt shift in the leadership ranks, no matter how the stock reacts. Dollar General (DG -0.41%) is a good example of this today, but so, too, is Walt Disney (DIS -0.04%).
Out with the old and in with the older
The big news at Dollar General on Oct. 12 was that former CEO Todd Vasos was coming back to lead the company. The retailer's stock rocketed higher, showing that investors were pleased with the return of the company's old leader. But what really changed?
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A part of Dollar General's recent weakness is related to consumer buying habits in the face of economic headwinds. Simply put, the retailer's customers are hunkering down, buying lower-margin basics, and cutting down on higher-margin splurges. There's not much that Vasos can do about that.
To be fair, operational issues have plagued the company, too, with a recent Bloomberg article labeling Dollar General as potentially "the worst retail job in America." There is a great deal that a CEO can do to improve things on that score, but it isn't likely to be a quick fix. The return of Bob Iger at Disney is actually pretty telling on that front, since the media giant rose on his rehire but is now below where it was when he came back in late November 2022.
The task of getting Disney's direct-to-consumer business back on track simply wasn't something that Iger, or anyone, could achieve in a short period of time. That's why surprise CEO transitions need to be taken with a grain of salt.
Making a directional shift has broader implications
The first thing investors need to recognize is that a surprise CEO change often means that the board of directors believes the company's heading in the wrong direction. Bringing in a new person is a way to change direction, but it also says that the board may have made a mistake by hiring and trusting the CEO who is being replaced.
The board is supposed to be your representative, so it isn't a positive sign if they pick the wrong leader. Don't have the knee-jerk reaction that so often happens on Wall Street of thinking a new CEO is a good sign -- it may not be as good as you think.
But it gets even more interesting when the new CEO is the old CEO. That tells you that succession planning wasn't handled particularly well. Once again, the board is supposed to represent your interests. If it's bringing back the old CEO, it's a clear admission that they picked the wrong person and are, effectively, trying to start the process over again.
Mistakes happen, but that acknowledgment doesn't make the situation any better if you own the stock. The company is, basically, back where it started before the CEO change, only now the business might be in worse shape than it was before the last leadership transition.
And just like Iger couldn't turn Disney around right away, it seems likely that the fix at Dollar General will be a long one, too. It doesn't take much to figure that out, just a quick look at the headwinds that each company faced when the old CEO was brought back in to replace his replacement. In both cases, the CEO transition, while cheered by Wall Street, was a sign of bigger problems.
Sometimes a second act isn't as good as the first
As an investor, you have to understand that companies move along a sine curve, not in a straight line up or down. So there will be good times and bad times. When there's an abrupt CEO change, it's likely a sign that the company is on a downswing. Sometimes a shake-up of the executive suite will make sense, but rarely will it lead to quick results. Giant public businesses just don't spin on a dime like that.
Instead of following the crowd, step back and consider why the change is being made -- and, perhaps more importantly, what it might actually mean for near-term business performance. The answer will likely be "not much." And if that's the case, buying on the news could end up being a costly mistake, as Disney's stock decline since the return of Iger shows. A better bet might be to wait for tangible evidence that the business is on a better path.
