Starbucks CEO Kevin Johnson is retiring, effective April 4, and in a surprising move, the coffee giant’s former owner Howard Schultz will return for a third stint as CEO.
Mellody Hobson, Starbucks’ chairwoman, has stressed that Schultz’s return is temporary—with a replacement to be named by the fall—but the transition plan or lack thereof rings odd. Most companies of Starbucks’ size and stature have a successor ready prior to the CEO’s departure, and Johnson informed the board last year of his intent to retire.
Hobson acknowledged in a CNBC interview that Schultz was not expected to replace the outgoing CEO at the time. “It was recent,” she said, adding that the company has engaged Russell Reynolds Associates in the CEO search, without specifying when the search began.
The use of temporary CEOs is not new, but research from the Harvard Law School Forum on Corporate Governance found the share of interim CEOs in the S&P 500 has more than halved, from 15% in 2019 to 7% in 2020.
“We’re not gonna hire a CEO over Zoom, I can tell you that,” Hobson noted, as a possible reason for the interim placement of Schultz. While the COVID-19 lockdown prevented in-person meetings for about a year, the vaccine’s mid-2021 arrival has since spurred a return to in-person activity, and many companies have tapped new CEOs during the pandemic—most famously Amazon last year.
Starbucks’ CEO search will likely be more challenging than normal for a high-performing company with a well respected brand. The company’s share price grew more than 50% during Johnson’s tenure and it ranks No. 8 in Fortune’s recent list of Most Admired Companies. But its new CEO will have to contend with a growing unionization drive and a shareholder push to change how it approaches those efforts. Hobson conceded to CNBC that the company had “made some mistakes” in addressing workers’ concerns.
Trouble finding a successor
Stabucks’ succession plan is far from ideal, and certainly peculiar, leaving some business strategists scratching their heads as to why the board didn’t have a permanent CEO at the ready.
“Starbucks’ board presumably had a year to find Johnson’s successor and they weren’t able to find the right person,” Pat Petitti, CEO of the freelance consulting firm Catalant, tells Fortune. “This points either to a lack of clarity on the strategy and go-forward focus of the company, or a lack of alignment at the board level on the attributes of the ideal CEO for the company’s next era.”
That next era includes hyper-growth, with an expansion plan to reach 55,000 stores globally by 2030. In light of this, and what will likely be a lofty pay package–after all, Johnson saw his overall compensation grow almost 40% from $14.67 million in 2020 to $20.43 million in 2021–Starbucks’ CEO search seems hurried.
“Given the additional context of former COO Rosalind Brewer’s departure and the generous executive compensation plans proposed last year, it certainly seems like the board was not planning to bring Mr. Schultz back for his third term at Starbucks,” says Dieter Waizenegger, executive director of SOC Investment Group.
Waizenegger, whose firm is one of the shareholder groups urging Starbucks to reverse course on its anti-union strategy, says the company’s actions signal that “the board is not as far along with the succession plan as they hoped to be.”
When reached for comment, Starbucks declined to further discuss the timeline of the transition and decision to bring Schultz back.
Unusual context for a CEO transition
To some extent, any CEO search today will be far more complex than in years past. The business environment has changed dramatically over the past two years, as have the skills needed to be an effective CEO. Today’s CEOs are bombarded with new regulations and rapidly shifting demands from the labor market, consumers, and shareholders.
Even Schultz, who oversaw a period of expansive growth in his first stint as CEO and later guided the company out of the 2008 recession in his second, may find the current environment to be challenging despite his history of operational success.
“[Starbucks] is a very different company today than it was two years ago, let alone when Mr. Johnson took the helm,” Waizenegger says. “At a moment when unions are historically popular and the next generation of consumers has a strong desire to support corporations where workers are respected, the board needs to decide if the company can afford to antagonize its workers, or if it will meet the moment and burnish its reputation as a ‘people positive’ company.”
Investors today want to know “how companies are performing on a range of issues, not just financials,” says Christine DiBartolo, the Americas lead for corporate reputation practice at FTI Consulting. At a time when companies are struggling to retain employees, Starbucks’ incoming CEO will have to understand and adapt to the workforce demands of the future. “We now have a new generation of employees who cares deeply about [social] issues, has employment choices, and won’t work for a company they don’t think is doing good,” DiBartolo says.
This reasoning may, partly, explain Schultz’s return to the coffee retailer. The billionaire, ranked No. 212 on Forbes’ list of America’s wealthiest people, is credited with developing Starbucks’ reputation as a great place to work for part-time employees.
An employee at a Buffalo, New York store that voted to unionize told the Wall Street Journal it seemed that “Howard was more concerned about the personal connection that Starbucks talks about,” whereas more recent corporate leadership was overly focused on financial measures and operational efficiency in interactions with store workers.
The path ahead
Starbucks’ unionization drive has now spread to more than 100 stores across 26 states, and as executive chairman, Schultz has been involved in the company’s efforts to find a solution that doesn’t involve forming a union. In November of last year, he traveled to Buffalo to address workers ahead of the first union votes at three stores in the area, which some viewed as an attempt to snuff out the campaign.
Still, Schultz seems to have a wide base of support within Starbucks, Petitti says, because he grew it from relative infancy into a global behemoth. “But introducing a former leader back into an organization while anticipating that this change will be short-lived is a tremendous amount of whiplash for a team to handle.”
Finding a CEO who is both willing and able to handle the growing union drive, and has the operational chops to run a company of Starbucks’ size and scope is a fairly narrow target to hit. The company may need more than a few months to lock up the right successor.
“The growing unionization movement within the ranks of Starbucks’ employees has to be an enormous consideration for who, how and when they bring in their next CEO to replace Schultz,” says Dan Romanow, director of strategic consulting and solutions at Brooks Bell, a consumer experience consultancy.
Schultz is re-entering the corner office at a time when nearly 140 stores have filed for NLRB elections. The company is also facing accusations of illegal moves in union opposition.
“How he demonstrates empathy for the shifting labor environment of the past few years will either set a replacement CEO up to sustain positive momentum and collaboration, or will entrench Starbucks in a years-long battle that the company hasn’t faced in its history— and one of which few industry leaders would be positioned to do successfully,” Romanow says.
For now, the search continues.
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