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Photo: Getty Images
Photo: Getty Images

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How Your Favorite Stores Get Their CEOs

In the past year alone, we've seen dozens of high-profile CEO hirings and firings, retirements, and promotions.

Another day, another new exec running your favorite store. Or maybe it's not your favorite store, and that's why the company's board of directors has hired yet another CEO to reverse those dwindling sales, crappy assortment, and overall bad feeling shoppers have about what seems destined to become a retail relic, if it's not one already.

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In the past year alone, we've seen dozens of high-profile CEO hirings and firings, retirements, and promotions. American Apparel booted Dov Charney, temporarily replacing him with the company's CFO, then temporarily replaced that guy with someone from a turnaround firm. (Who will permanently land in the top seat? Unclear.)

In August, Target hired former Pepsi exec Brian Cornell to make the company "cool again." Then, JCPenney—back on track, if you want to call it that, from the disastrous Ron Johnson era—announced Myron "Mike" Ullman would be replaced by Home Depot exec Marvin Ellison. (Ullman, who was CEO for seven years before the dwindling-but-profitable Penney brought in former Target and Apple exec Johnson to shake things up, was rehired to essentially stabilize things after Johnson's bold tactics—no discounts, design focus—made terrible sales even worse. Ullman is going to stick around for about a year to show newbie CEO Ellison how it's done, and then he'll be kicked upstairs to the board, where he'll serve as its executive chairman.) More recently, Gap Inc. announced that CEO Glenn Murphy would step down in 2015, with the company's digital head Art Peck replacing him.

If appointing retail CEOs sounds a like a game of musical chairs featuring a small pool of aging white guys, that's because it is a game of musical chairs featuring a small pool of aging white guys.

In 2011, New York-based executive search term Russell Reynolds released a study that looked at "turnover and recruitment trends between January 2006 and April 2011, at 81 multi-channel retail companies headquartered in the United States, with annual revenues of $1 billion or more." A rep for Russell Reynolds says that the firm has not released new data since, but three years later, it's still pretty telling.

American Apparel's CEO seat has been rotating since the very public ousting of founder Dov Charney. Photo: Getty Images

First off, CEO turnover in the retail sector is crazy high. Of the companies evaluated in the study, 59 percent had a CEO change-up between 2006 and 2011, with 42 percent of outgoing CEOs serving five years or less. (When you look at the pool of all Fortune 1000 CEOs, that number drops to 32 percent.) And a bunch of bosses—27 percent—left after less than three years. (For Fortune 1000 CEOs, it was only 16 percent.) Slicing the data in a different way, Russell Reynolds determined that retail CEOs are 80 percent more likely than other large-company CEOs to leave their posts within two years.

Anecdotal evidence—that is, the news reports of all these CEO switcheroos—suggests that not much changed since 2011. Why, then, is it so hard to make a retail CEO stick?

It's important to first understand the typical process of appointing a CEO in the retail space. A company's board will look to replace leadership if: the current CEO's strategy has resulted in slumping sales (like with Ron Johnson and JCPenney), the current CEO is retiring (such as Lew Frankfort at Coach), or the current CEO is enveloped in scandal (Dov Charney is a common example of the latter, but Target's Gregg Steinhafel—who got a lot of flack when the company's database of consumer credit card numbers was hacked—could fall into that category as well).

Retail CEOs are 80 percent more likely than other large-company CEOs to leave their posts within two years.

There are other reasons, too. Sometimes, a CEO is great at accelerating growth when a company is still young, but keeping up the momentum requires another set of skills. Other times, there's a personal matter that overrides any professional responsibilities. CEOs are also poached by other companies, as with Angela Ahrendts, who resigned as Burberry's CEO after scoring an executive position at Apple.

Almost every time, the company will hire a recruitment firm, such as Russell Reynolds, to try and find a new CEO. Even in the cases when an internal candidate is the first choice, the board will often still practice due diligence by conducting an outside search. In general, a member of the board will initiate the request with a search firm, usually one the retailer has worked with in the past. The search will take weeks, not months, if things go well. Recruiters—don't call them headhunters, they don't like that—will already have a list of potential candidates at the ready after years of interviews, so they spend those precious weeks finding new blood to add to the mix. After what should be an exhaustive search, the firm will present the board with one to three candidates, explaining why they will fit into the company culture, and what skills they possess that the company so desperately needs.

This summer Target appointed a former Pepsi exec as its new CEO. Photo: Getty Images

Successful placements can garner a recruitment firm that's on a retainer anywhere from a third to half of a CEO's first-year cash compensation, often capped at a million dollars. So if a newly minted exec is set to make $2 million in his or her first year—not including stock options and other non-cash benefits—the recruitment firm can receive up to a cool million. Retained recruiters work with the client exclusively: Both sides agree at the beginning that only the designated recruiter will go after potential candidates for a certain period and that no other recruiter will be called in.

There are also contingency firms, which don't charge an upfront fee and are cheaper, but they tend to have less stellar track records and don't dedicate as much time to one company's search. They're sort of like the personal injury lawyers of recruiting: They don't take any money unless they win. A board might hire a handful of contingency firms to search for candidates. The winning firm gets the fee, which can be between 15 and 20 percent of the executive's annual salary.

Then there are the turnaround firms, which are often hired before a recruiter is called in. If a retailer—like American Apparel, for instance—is in really big trouble, its board will bring on a turnaround firm to help steer the business in the right direction. The firm will then place one of its own at the head of the company as interim CEO. While it's getting the company's books in order, the turnaround firm will also work with a headhunter to find the right permanent CEO. (American Apparel hired New York-based turnaround firm Alvarez & Marsal to help rebuild the company; A&M's managing director Scott Brubaker is currently running the Los Angeles-based maker of deep V-neck tees.) The idea is the company will attract a higher-quality CEO if its prospects are better. The process can take up to a year or a year and a half, depending on how dire the situation.

Some recruiters say that hiring at the top is actually much easier than hiring for a mid-level position since the pool is smaller.

Some recruiters say that hiring at the top is actually much easier than hiring for a mid-level position since the pool is smaller, meaning those top-level appointments are the recruitment industry's equivalent to margin drivers. But CEOs still aren't easy. Especially in retail.

"It's a very frenetic industry," says Jason Hanold, CEO of Chicago-based recruiting firm Hanold Associates. "If you think about the business, it's about weekly and daily results. Very few companies have that kind of turnaround. It starts with the pace. Candidates have to be wired for fast decision making."

In the past, merchants, the people who actually choose what's in stores, ruled retail; J.Crew's Mickey Drexler and L Brand's Les Wexner are both known for being great merchants. But now—thanks to the growing complexity of the retail industry via increased competition, globalization, and, uh, the internet—a CEO must not only get product, but also operations, logistics, customer service, and so on.

The best CEO candidate will be good at hiring a handful of top-level execs who are masters in different areas of the business. A CEO's job is, today more than ever, to make sure these areas are all working together, not to actually work in any of them. "Historically, a retail CEO was a great picker of product," says Les Berglass, CEO of Berglass and Associates, a New York-based recruitment firm credited with placing CEO Sharen Turney at Victoria's Secret and Paul Blum at Fred Segal. "Today, the CEO must be a great picker of people."

JCPenney's Ron Johnson was replaced by a former CEO of the company, who is now being replaced once again. Photo: Getty Images

"The product has to be right, yes," adds Jeff Feinberg, a managing director at Alvarez & Marsal. (Feinberg declined to speak specifically about American Apparel, or any of the turnaround firm's other clients.) "You have to know what product the consumer wants, you can't substitute that. But a CEO needs to surround himself with folks that really get IT, that are on the cutting edge of omnichannel, that understand what's happening in-store. There are so many ways to touch the consumer—you have to be aware of them all."

There's the tech stuff, sure, but retail has always been a challenge. It's a trend-driven, cyclical business, which means it's much harder to keep sales up year over year and month over month. Take America's teen retailers for example. For two decades, Abercrombie & Fitch, American Eagle, and Aéropostale took advantage of the fact that most young people wanted to wear sanitized, preppy clothing. Then fast-fashion came along and essentially ruined their entire business plan, making their margins look crappy and transforming the way teenagers shop in the process.

Or think about Coach, which knew for years that brands like Tory Burch and Michael Kors were driven to steal market share from its logo-driven, mid-priced bags. Coach's strategy has been to go in a more high-end, refined direction with British creative director Stuart Vevers, but the brand acknowledged in its last earnings call that the shift has contributed to what is hoped to be a short-term slump in sales.

Recruiters and board members alike blame the vicious cycle that public corporations feel enslaved to.

One would assume, given the transformative nature of the industry, that companies and recruiters would try to look for retail CEOs far beyond the typical pool. The problem with that, for public companies at least, is the stock market. Look at JCPenney, which brought in Ron Johnson to innovate. In the end, the board rehired its old CEO—who had been iced out in the first place for not being innovative enough—to stabilize things.

Where are the women? Minorities? People under 60? Recruiters and board members alike blame the vicious cycle that public corporations feel enslaved to: They must hire the people with the most experience, preferably those who are currently employed as CEOs, and most of those people are...well, you know. Male. White. Old. And most importantly, unlikely to unnerve shareholders.

What has changed is that brands no longer want to poach from their peers. Instead, they're looking at leaders with a particular skill set instead rather than a specific resume; Target hiring an "outsider"—Pepsi's Cornell, as opposed to a big box store vet—is a good example of this. "Very few companies are interested in hiring from their direct competitors," says Hanold. "They want people who have done well in adjacent sub-industries, not people from companies they've been down on for years. A lot of these choices are based on optics. How does the press release read? What kind of message does it send to the workforce?"

This also helps when it comes to non-compete agreements, which bar execs from jumping ship to a competitor. While it's something recruiters still must weigh, non-competes are, on the whole, becoming less of an issue. Yes, large companies with lots of money may sue if poaching is indeed involved, but with the tech industry ignoring what they consider these unenforceable clauses, other industries like retail are following suit.

In the end, though, it all comes down to one crucial thing. "We're looking for breeders of talent," says Berglass, "and those who surround themselves with talent."


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