3 Dow CEOs That Should Follow Walmart’s Duke to the Exit

by Susan J. Aluise | November 27, 2013 12:39 pm

“The buck stops here” said the now-famous sign on President Harry S. Truman’s Oval Office desk.

Source: Wikipedia[2]

Nearly 70 years later, that clarion cry for accountability from top leadership persists in corporate America — particularly at publicly traded companies where CEOs feet are (or at least should be) held to the fire.

Consider Walmart (WMT[3]): Embroiled in a Mexican bribery scandal and reporting lower revenue and comp sales for the most recent quarter, the retail giant “encouraged” CEO Mike Duke toward the exit this week[4]. Duke, who leaves in February, is handing the reins to Doug McMillon, head of Walmart International.

Duke’s departure illustrates how high the stakes are for CEOs when their publicly traded companies stumble. And nowhere is leadership scrutiny as intense as among the Dow Jones Industrial Average components, where high-powered (and highly compensated) CEOs must adeptly steer their massive ships into profitable sea lanes while avoiding unseen reefs or sudden storms.

Several Dow CEOs are tacking against the wind now, but the three below are facing perfect storms that could — and perhaps even should — force them to follow Walmart’s Duke to the exit:

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Ginny Rometty, IBM (IBM)

Source: Wikipedia[7]

Ginny Rometty, who took over from Sam Palmisano as CEO of IBM (IBM[8]) in January 2012, faces significant headwinds helping Big Blue transform itself for the 21st century.

Although Rometty has been instrumental in turning the IT giant’s attention toward the revolution in cloud computing, the transition is likely to be slower and rockier than shareholders hope.

True, IBM made $1 billion in cloud revenue last quarter, but those gains didn’t come close to offsetting declines in software and server revenues. IBM’s Systems and Technology segment last month reported $3.2 billion in revenues in the third quarter — down 17% from a year earlier. Its server hardware business took an even bigger hit, coming in 38% below last year’s results for the same quarter. The company’s mainframe and low-end server and storage hardware revenues took a hit as well, although IBM’s System X mainframe business gained.

Still, these numbers show a steep decline in the company’s traditional hardware and software businesses that will not immediately be offset by gains on the cloud side of the house. A more ominous sign: sales in China, which account for 5% of IBM’s total revenue, are falling hard and fast — down 22% in the last quarter alone. Big Blue also faces tough competition in the cloud arena, where vendors like Amazon (AMZN[9]) are slashing prices to gain market share.

Every major advancement in information technology has a disruptive impact on established market players. Ginny Rometty gets it and is refocusing the company in growth areas like cloud, Big Data and business intelligence. In the government space, IBM’s Smart Cities initiative eventually will pay off. Still, the pace of change often gives leaner, meaner competitors the edge.

Although many of these factors are beyond her control, IBM stock is down 4% since Ginny Rometty took over — the Dow is up 30% during that time frame and the S&P 500 has gained more than 40%. That kind of disparity can make shareholders nervous.

Although Warren Buffett remains a believer in IBM, it doesn’t help that hedge-fund superstar Stan Druckenmiller is shorting the stock[10].

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Jim McNerney, Boeing (BA)

Source: Wikipedia[12]

Shareholders who have been riding Boeing’s rise since Jim McNerney took the helm in mid-2005 have been handsomely rewarded — the stock has more than doubled since then, which is twice as good as the Dow and the S&P 500 during that same period.

But BA faces serious headwinds, too. The FAA this week will warn airlines not to fly Boeing jets equipped with General Electric’s (GE[13]) new GEnx engines near thunderstorms in the wake of ice buildup on some 787s and 747-8s. United Continental (UAL[14]), the only U.S. operator of the Dreamliner, has GEnx engines on all of its 787s. GE is working on a software fix for the problem, but it is unwelcome news for the troubled 787 program — and for McNerney.

This week’s news adds to the agitation over the 787’s so-called “teething troubles” — the first 787 was delivered in September 2011 — 40 months behind schedule. The FAA grounded the jets worldwide in January after lithium-ion batteries in two 787s overheated — and in one case caught fire. BA fixed the plane, which returned to service in late April, but three months later, a parked Ethiopian Airlines 787 caught fire at London’s Heathrow Airport from an apparently unrelated cause. These challenges have all happened on Jim McNerney’s watch — and with the all-important 777X launch looming, BA can’t afford similar delays or teething troubles.

But BA is in another tiff with its Machinists’ union, which rejected a contract extension last week that would have kept production of the 777X in Washington state. Boeing says it’s done talking to the union until 2016, when the current contract expires, and is checking out moving 777X production to other states[15].

If the Dreamliner’s glitches persist — or the union standoff raises concerns about production delays with the 777X — Jim McNerney could be pushed out. If that happens, Ford (F[16]) CEO Alan Mulally could top the short list. Mulally, the former president and CEO of Boeing Commercial Airplanes, is an aerospace engineer who designed most of BA’s current fleet. He worked wonders with Ford’s unions and personally spearheaded the highly successful 777 program, leaving him well qualified to take the twin-engine mini-jumbo into its next generation.

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Jamie Dimon, JPMorgan Chase (JPM)

JamieDimon[17]Jamie Dimon has had a rough couple of years, but JPMorgan (JPM[18]) shareholders have stuck with him anyway.

Since taking the helm at the end of 2005, the banking wunderkind who built Citigroup (C[19]) with mentor Sandy Weill back in the 1980s and ’90s, has enhanced the global financial services company’s valuation (to a $214.9 billion market cap) and assets (now $2.46 trillion) despite the Great Recession and the eurozone debt crisis. JPM stock has gained 44% during his tenure.

So why do so many people want Jamie Dimon’s head on a plate right now?

JPM’s $4 billion increase in litigation expenses during the second quarter broke a 17-quarter streak of earnings growth by U.S. banks, according to an FDIC report released Tuesday. JPM also reported its first quarterly loss on Dimon’s watch[20] — a consequence of having to set up a $23 billion reserve for its wide-ranging legal expenses.

Those are some of the reasons the banking industry’s fair-haired boy has morphed into the whipping boy for JPM’s many recent missteps — most notably the “London Whale” scandal where rogue derivatives trades served up some $6 billion in trading losses and nearly $1 billion in fines.

Last week’s record $13 billion DOJ mortgage-backed securities settlement can’t completely be laid at Dimon’s feet — most of the MBS belonged to the troubled Bear Stearns and Washington Mutual, which JPMorgan acquired in 2008. But Jamie Dimon is shouldering the blame anyway.

JPM inked another $4.5 billion deal with institutional investors to settle claims tied to JPM and Bear Stearns mortgage-backed securities, but Dimon has vowed to continue the fight to have the FDIC absorb the WaMu claims.

Jamie Dimon, who not long ago was talked up by President Barack Obama as the best and the brightest, is now widely reviled — particularly in the press — and his assertive leadership is now viewed as hubris. In July, the Comptroller of the Currency, which regulates national banks, asked Dimon to step down as chairman of JPM’s main operating subsidiary. And despite the fact that JPM’s stock has soared, Dimon still was skewered[21] in JPM’s ill-advised Twitter blunder earlier this month.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities. 

  1. [Image]: https://investorplace.com/wp-content/uploads/2013/11/MikeDuke.jpg
  2. Wikipedia: http://en.wikipedia.org/wiki/File:Leading_Through_Adversity_Mike_Duke.jpg
  3. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  4. “encouraged” CEO Mike Duke toward the exit this week: https://investorplace.com/2013/11/walmart-wmt-stock-doug-mcmillion
  5. Compare Brokers: https://investorplace.com/options-trading/broker-center/
  6. [Image]: https://investorplace.com/wp-content/uploads/2012/05/Rometty180.jpg
  7. Wikipedia: http://en.wikipedia.org/wiki/File:Ginni_Rometty_at_the_Fortune_MPW_Summit_in_2011.jpg
  8. IBM: http://studio-5.financialcontent.com/investplace/quote?Symbol=IBM
  9. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  10. Stan Druckenmiller is shorting the stock: https://www.valuewalk.com/2013/11/stan-druckenmiller-recommends-ibm-short-shares-dip/
  11. [Image]: https://investorplace.com/wp-content/uploads/2013/11/JamesMcNerney.jpg
  12. Wikipedia: http://en.wikipedia.org/wiki/File:W._James_McNerney,_Jr_State_Department_Global_Business_Conference_2012_cropped.jpg
  13. GE: http://studio-5.financialcontent.com/investplace/quote?Symbol=GE
  14. UAL: http://studio-5.financialcontent.com/investplace/quote?Symbol=UAL
  15. checking out moving 777X production to other states: https://investorplace.com/2013/11/3-reasons-might-reached-peak-boeing-stock
  16. F: http://studio-5.financialcontent.com/investplace/quote?Symbol=F
  17. [Image]: https://investorplace.com/wp-content/uploads/2013/11/JamieDimon.jpg
  18. JPM: http://studio-5.financialcontent.com/investplace/quote?Symbol=JPM
  19. C: http://studio-5.financialcontent.com/investplace/quote?Symbol=C
  20. reported its first quarterly loss on Dimon’s watch: http://dealbook.nytimes.com/2013/10/11/jpmorgan-reported-third-quarter-loss-on-legal-costs/
  21. Dimon still was skewered: http://www.americanbanker.com/people/jpmorgans-askjpm-twitter-experiment-goes-horribly-awry-1063655-1.html

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