J.Crew’s Pop-Up CEO Office

j.crewAnd then there were four.

Former J.Crew CEO James Brett recently announced he was packing up after a year-and-a-half on the job. That’s about the amount of time most CEOs need just to get their bearings. The company rushed out a press release claiming it was a matter of ‘mutual agreement’ between Brett and the board of directors.

The J.Crew board replaced Brett with a quartet of senior officers, including “Michael Nicholson, president and COO, Adam Brotman, president and chief experience officer, Lynda Markoe, chief administrative officer, and Libby Wadle, president of Madewell Brand.”

For now.

There are many things to sort out with this story, but let’s start with asking why Brett was so dispensable that the question of his replacement was deemed secondary? What could have gone so wrong and so soon? To answer that, we have to look at several apocalyptic themes at work here.

Team of Rivals

It is a truism that when a CEO’s exit is described as “mutual,” it is sugarcoating that the board was in full revolt. When the board appoints a foursome as his replacement, it is disguising something more alarming, a complete lack of a succession plan. It could only be a sign that the company had no visible leader, yet by summarily dismissing the current job holder it left a team of rivals in his place and left itself little choice than to appoint all of them. But there may have been a reason for the board’s madness.

The interim role, which I describe as a pop-up CEO office, has far more significance than the usual stand-in. When a board appoints someone in ‘acting’ mode it is usually a well-respected executive officer who has the support of the team but is under no illusion that he or she is going to succeed the chief executive. In J.Crew’s case, that’s not true. They are all rivals for the job. It suggests the board is challenging them to cooperate to restore the company’s magic. The obvious incentive is that if the team rises to the occasion and selects the best leader to run the company, even while sacrificing their own ambition, everyone benefits. If the rivalry takes over, the board goes outside for a candidate, and everyone loses. It is a version of the psychological game known as ‘prisoner’s dilemma’ in which betrayal proves more costly than cooperation.

Private vs. Public Equity

Under its previous CEO, Mickey Drexler, the store chain mismanaged its brand to the point of being unaffordable, and it was losing its cool among those willing to pay the high price points. At the time of his resignation, Drexler’s tenure was also about to collapse under a pile of debt the private equity owners had placed on the company, in part to self-enrich.

The company only managed to avoid bankruptcy in 2017 by convincing bondholders to transfer debt into equity, making the shareholder class very bondlike, a perilous place for a long-term player. Then, shortly after the announcement of the deal, the major shareholders, TPG and Leonard Green, borrowed even more to help finance dividends to themselves totaling $787 million.

A bondholder mentality isn’t a great place to be in the middle of a turnaround. In Seattle, there is a formidable adversary for short-term thinkers and he thinks in terms of how to grow the business in five years or more, not the next quarterly dividend check. The lesson for private equity run public companies is that let bondholders stick to bonds, and board directors stick to thinking about shareholders.

Dinosaur breath

The third problem at J.Crew was the presence of a ‘presence’ on the board. Mickey Drexler is not just any former CEO, he is board chair and 10% shareholders, in other words, he’s the ax, the kingmaker, and the king-toppler.

When legendary CEOs continue to sit on the board of the company they ran, they create an immediate credibility vacuum. Smart advice to those who follow famous leaders is “never replace the legend, replace the guy who replaced the legend.” In Brett’s case, his moves to change the company were most likely seen as a repudiation of Drexler, especially by Drexler.

Most public companies do not permit the former CEO to stay on the board, even to the point of sacrificing their experience and wisdom to give the current CEO a chance to be his or her leader. Maintaining the legacy figurehead at the board level sets the current officer holder up for failure, as it most likely did Brett.

Board dependence

Demonstrating Drexler’s power over the board, as well as its lack of independence, once he was deposed for mishandling the company’s affairs, he was subsequently named the chairman. In that role, he also became instrumental in choosing his successor. An interesting reward for failure.

Drexler was also a 10% owner of the company, making him de facto swing vote and boss. Any CEO appointed under those circumstances knew they were facing not just a challenge in the market but inside the boardroom.

The second battle became unwinnable.

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