When a CEO is “Retired” by the Board of Directors investors almost always get the short end of the information stick. Last week Walgreens Board announced that its then Chairman and CEO, Jeff Rein, retired at the age of 56. They at least spared us the usual palaver about leaving to spend more time with his family or pursue other interests. The fact of the matter is that the Board fired the CEO, but didn’t bother to tell investors why. Readers of this blog may recall that I spent 23 years at Walgreens, 15 of which I had the pleasure of being the principal investor relations contact for the company. So naturally, I wanted to know more about what went on. (On a note of full and fair disclosure, I will also tell readers that I am not now, nor have I ever been, a fan of the recently departed CEO. In fact, disagreement with him was the principle reason I left Walgreens nine years ago. But then again, in the past few days as I’ve talked to investors, analysts and former employees, I haven’t been able to find anyone who claims to have been a fan. How do guys like this get to be CEO in the first place?)
When someone as important as the CEO is asked to step down, investors deserve a reason that is credible, not the window dressing we usually see. In this case I think it boils down to a couple of key issues – performance and strategic direction. The performance issue is easy to see – under Rein’s watch earnings per share performance became much more erratic and the share price has slumped. However, I don’t think that alone was enough to do him in. Probably the deeper and more far-reaching reason for his dismissal was over the future strategic direction of the company and a failure of leadership.
Since the late 1970’s Walgreens has been one of the great organic growth stories in America. The premise was simple: open ever increasing numbers of drugstores, run them well and ride the rising demographic wave of baby boomers taking more and more prescription drugs as they get older. However, somewhere in the last few years, as the number of new stores opened every year rose to over 300, return on assets and return on equity began to slip and expense ratios began to rise. This was accompanied by a declared shift in strategy from just running drugstores to investing in other healthcare concepts such as in-store clinics, specialty pharmacy and acquisitions. If you were viewing this from afar, it almost looked like a Boston Consulting type of strategy – use the drugstores as cash cows to fund faster growing healthcare concepts, but the overall emphasis continued to be on growth.
Then, earlier this year, interesting things started to happen. In June, the company hired a new CFO from the outside, an unusual occurrence in a company that prides itself on promoting from within. One month later the company announce that it would slow its rate of organic drugstore growth and investors started to hear from the new CFO about plans to improve return on assets and rationalization of SKU counts in the stores. In September, Walgreens announced that it was making a bid to acquire Longs Drugstores, a chain of almost 500 stores on the West coast, which on the surface, seemed to be at odds with the declared goal of slowing growth and increasing returns. Then it was revealed that earlier this year Walgreens had been in talks with Longs about the possibility of acquiring it. Finally, in October, Walgreens terminated its bid for Longs after being unable to get Longs to agree and two days later Rein, Walgreens’ CEO “retired”.
So when I try to piece things together, here’s how I interpret things: There seems to be two competing long-term strategies at Walgreens over the past nine months – one that was committed to growth at any price, and one that recognized the limits to growth and sought slower growth with higher returns. When the original acquisition talks with Longs did not pan out earlier this year, it would appear that the Board of Directors endorsed a view towards slower growth. Then, within sixty days of announcing this new strategy, something changed – my guess is that Walgreens’ CEO bought into some new arguments by investment bankers that they could get the Longs deal done – and they decided to publicly pursue Longs. While technically, the acquisition bid is not at odds with the slowing of “organic” growth previously announced, investors were confused. Finally, when Walgreens’ CEO couldn’t get the deal done, the Board axed him for both zigging when they had publicly said they were going to zag and failing to be a strong enough leader to get the job done.
All of this is speculation on my part, and that’s my point as it relates to investor relations. The Board of Directors at Walgreens did not give any good reason for why the CEO was forced to retire, nor did they offer any indications as to the long-term strategic direction of the firm implied by the ouster. Investors are left to speculate, which cannot be good for the stock. These sorts of situations are messy, and I can understand why companies want to keep their dirty laundry hidden. On the other hand, investors own the company and Boards of Directors act on their behalf. Clarity on why the Board acted and what it means for the future direction of the company should be the least we can expect in terms of good corporate governance.