In today’s short-term market dynamic, slow, steady, and dependable revenue growth isn’t enough to keep investment dollars engaged. In its place, I see companies engaging in what can only be described as a CEO draft cycle that mirrors that of professional sports. In sports, it’s called the superstar externality, a phenomenon whereby a single superstar recruit can boost audience attendance by anywhere from 5 percent to 20 percent. High-profile players aren’t necessarily being recruited to win games or seasons but to fill seats and boost TV revenues. The same phenomenon is playing out today in corporations, but instead of season’s tickets, the CEO game is about selling stock.
Look carefully and you’ll observe three trends with corporate leadership.
First, CEO tenures have fallen sharply over the last 50 years from around 10 years on average in the 1970s to roughly 7 years today—a record low. Some chalk this up to market volatility. Others attribute it to greater market scrutiny of CEOs and the increased influence of activist investors. While these may have something to do with it, I think there’s more at play, which I’ll get to.
The Half-Life of a CEO
When you spend as much of your time speaking at conferences as I do, you get a front-row seat at the CEO Moneyball game. In the first 100 days, newly minted CEOs are paraded in front of attendees at conferences and industry events, where they typically engage in Q&A about their company’s new direction. One generally, couched in vagaries like finding efficiencies, playing to the company’s brand strengths, and building a people-focused culture—boilerplate stuff that the media and markets gobble up like cotton candy. They might even pepper in a line or two about some amazing (but entirely undefined) things coming down the innovation pipeline. That’s generally enough to generate a pop in the stock price.
One study out of Oxford suggested that new CEOs who present their strategy within the 100 days of their appointment can see share values rise by an average of 5.3 percent on presentation day (around $2.8 billion in market value). The average stock price gains for presentations by new CEOs appointed from outside the organization were 9.3 percent (just under $5 billion), and for new CEOs from outside the company’s home industry they were 12.4 percent (around $6.6 billion).² Voila! Without lifting a finger to effect any meaningful business improvement, the stock price rises.
The next few quarters often see a flurry of PR and business news hits about the company’s high-profile plans and projects aimed at brand resurrection and revitalized competitive positioning—making one wonder, wouldn’t any real strategy be a corporate secret? Depending on how big the company is, there might even be a segment on 60 Minutes or other coveted news programs profiling the intrepid new CEO on a noble mission to revive the once-great brand. An elaborate piece of theater aimed at further juicing the company’s stock.
When the inevitable happens and neither revenues nor profits grow, the company can simply cover the shortfall with stock buybacks, reducing the available number of the corporation’s shares and thus artificially raising the earnings per share (EPS). EPS tends to be a headline-friendly indicator for many investors, particularly less savvy ones, which can once again spark an increase in the company’s value, even in the face of declining underlying performance.
And just about the time that shareholders and analysts begin to catch a whiff of bullshit, guess what? A new CEO is announced and paraded out to make similar overtures to the market and the cycle repeats. A grand show of what some call narrative capitalism—the selling of a story aimed at one audience alone. Shareholders.
The Shareholder Sugar-High
Before 1980, stock buybacks were rare and generally frowned upon. Indeed, buybacks were often treated by regulators as a form of market manipulation under the Securities and Exchange Act of 1934. Before 1980, companies primarily returned value to shareholders through dividends. That changed in 1982—one year after Jack Welch took over GE, when the SEC instituted Rule 10b-18, which provided a legal safe harbor for companies to repurchase their own shares without being accused of stock manipulation.
Since 1982, there’s been a veritable eruption in the use of stock buybacks to prop up earnings per share. By the 2000s, S&P 500 companies were dedicating almost all free cash to stock buybacks and shareholder dividends, while capital investments in their businesses slipped. Between 2012 and 2021, for example, total spending by U.S.-listed corporations on shareholder returns (share buybacks and dividends) was approximately 92 percent of aggregate net income, compared to 71 percent between 1982 and 1991.³ And in 2024, stock buybacks accounted for the majority of shareholder payouts.
The drawback for the broader economy is that stock buybacks do nothing but further concentrate wealth among the richest 10 percent of society (probably not you and me) because the richest 10 percent of Americans own close to 90 percent of all stocks.
So, profits that are generated through the effort and sweat of a company’s workforce are not invested in that workforce or in the company itself but, rather, simply handed to the wealthiest in society. It is a broad daylight picking of worker pockets to further enrich the richest.
The problem is, there’s only so much financial engineering you can do with a company before the house of cards caves in. The longer companies deprive themselves of capital investments in competitive capabilities, the more vulnerable they become to competition and other market forces. GE might have been Exhibit A in making this case, but there are dozens of other companies that have followed the same disastrous path.
Bed Bath and Beyond (BB&B) is a textbook example of how stock buybacks have become financial fentanyl for poorly performing companies. They are easy to get addicted to and deadly hard to quit. Between 1990 and the early 2000s, BB&B had become a dominant category killer in the home décor and accessories market. By the early 2000s, however, consumer behavior and economics shifted, and the company began losing ground to online retailers like Amazon and Wayfair and bleeding brick-and-mortar traffic to value players like Target, TJX, and Walmart.
To remain competitive, the company would have required massive improvements to its digital infrastructure, logistics capability, and private label brands as well as upgrades to its stores. Instead, between 2004 and 2016 the company went on a stock buyback bender totaling nearly $12 billion in repurchases, blowing through almost all of its free cash flow through that period. By 2016, BB&B had repurchased half of its outstanding shares. Ironically, by that time the company had a market capitalization of roughly $6 billion, half of what it had spent in buybacks.
In 2019, with 80 percent of its stock value depleted, activist investors ousted long-time CEO Steven Temares, citing a lack of strategy beyond—you guessed it—stock buybacks. In 2023, BB&B declared bankruptcy. End of story. Fade to black.
Excerpted from The Future of Competitive Advantage: A Business Plan to Save Your Customers, Your Company, and Democracy by Doug Stephens.
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