Friday, April 20, 2012

Disney Studio Chairman Out: Starting a Turnaround?

News just got in that Disney Studio chairman Rich Ross is stepping down, with no replacement announced. Rich Ross had a successful run at other Disney businesses including most recently its cable network Disney Channel, so his short tenure at Disney Studios (less than three years) comes as somewhat of a surprise. Or maybe it doesn't: Disney Studios are looking at a series of very disappointing movie releases, including the recently released "John Carter", which is already proving to be a major flop. The studio also has an unclear set of policies on what kind of movies to sponsor, and an unusual and complicated production structure that draws movies from a range of affiliate studies such as Pixar, Dreamworks, and recently acquires Marvel. In short, Disney Studios is a turnaround candidate.

The first page in the turnaround playbook is to replace the top management—usually the CEO (Disney is replacing the chairman instead). The substantive logic is that the CEO is too committed to the current strategy and may lack the capabilities for the new one; the symbolic logic is that everyone inside and outside the firm will know that the turnaround is serious if a new CEO is in place. The substantive part of this logic is slightly puzzling when the CEO has served for a short time, because the performance and even many actions will still be affected by the predecessor's decisions. So does it work? The obvious way to check is to see if CEO replacement in a turnaround situation improves performance or not.

A recent study by Chen and Hambrick finds that the first page of the turnaround playbook is too simple: Just replacing the CEO has no effect on the improvement of firms in turnaround situations. Instead, what is needed to improve the performance is to examine whether the current CEO has capabilities that match those of the firm and its strategic context, and whether a possible new CEO might have better fit of capabilities. Boards of directors (or corporate owners, in Disney’s case) need to think differently on two dimensions, then. First, there is no leverage in simply making a replacement. Second, replacement is not a matter of getting someone better than the current CEO on an absolute scale; it is about specific capabilities. Finding out what those capabilities are calls for serious analysis; it also suggests that replacing a top manager without identifying a successor at the same time is a gamble. But then, in the movie industry pretty much everything is a gamble, so maybe Walt Disney Co. CEO Robert Iger is still comfortable with this decision.

Orden, Erica and Ethan Smith. 2012. Disney Studio's Chief is Out. Wall Street Journal, April 20 2012.
Guoli, C., & Hambrick, D. C. (2012). CEO Replacement inTurnaround Situations: Executive (Mis)Fit and Its Performance Implications. Organization Science, 23(1), 225-243.