Steve Jobs As Rock Star CEO

01/27/2009 1:00 pm EST

Focus: STOCKS

Michael Brush

Columnist, MSN Money

Michael Brush of MSN Money explains why companies face challenges dealing with superstar CEOs and how Apple stands.

What makes it so hard to replace a rock star CEO?

Apple (Nasdaq: AAPL) investors may be asking this question if Steve Jobs, now on a medical leave, fails to return and the company stumbles.

Rock star CEOs are a select few. Some companies do fine when star CEOs depart. But why do so many falter?

Problem No. 1: Visionaries hate competition.

Vision is that uncanny ability to spot a potential trend before anyone else. When it comes time to leave, visionaries turn to their trusted assistants. But while they may have been great at implementing, they might not be so adept at spotting new trends soon enough to keep the business on top of its game.

Problem No. 2: CEOs pick their own successors.

Boards often cede chief executive officers too much responsibility for grooming replacements. Outgoing superstar CEOs may pass over the best candidates in favor of friends or someone "in their own image," says James Post, a professor of management at Boston University.

Problem No. 3: The old CEO hangs around too much.

Rock star CEOs rarely get pushed out. They often stay as chairmen. They're often founders, major stockholders, or both. This can be a big problem because without a clean break, it's tough for a successor to tweak the company's vision and strategy.

Problem No. 4: A company's success is too tied to the CEO.

Companies often use their PR machines to build up the "godlike" status of rock star CEOs. All the attention builds momentum among consumers and investors alike. But the benefits vanish quickly if a company doesn't have another superstar waiting in the wings—which is usually the case.

Problem No. 5: A succession plan is “too good.”

General Electric (NYSE: GE) goes to great lengths to rotate promising top managers among many divisions, giving them fresh opportunities to prove they're good enough to be CEO. But managers who survive the rigorous competition only to get passed over then leave to become CEOs elsewhere.

As a shareholder, it can be tough to track a company well enough to uncover any of these weaknesses in succession planning.

So here's one simple test: Look at the annual proxy statement and make sure the CEO doesn't earn total pay that's more than three times the pay of any of the immediate underlings. If so, these top managers may not have enough responsibility to learn how to take over.

Apple passes this salary test easily, since Jobs earned $1 in each of the past two years, while the next four execs below him got $5 million to $8 million each. Beyond that, it's not clear who would replace Jobs if he did not return.

At the moment, Apple has hot products such as the iPhone, and Jobs is scheduled to come back in July. But nervous investors who remember that Apple struggled the last time he left will no doubt be watching closely for his return. (The stock closed below $90 Monday—Editor.)

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