CEO Departures Reach a Record High and Cautionary Tales for Real Estate Investors

More CEOs are leaving their companies in 2019 than ever before. In this episode of Industry Focus: Financials, host Jason Moser and Fool.com and Millionacres contributor Matthew Frankel, CFP, break down why we're seeing a record number of CEO departures and whether or not it's good for a founder to keep running maturing businesses. Plus, Frankel gives real estate investors a bit of cautionary advice. The duo also discuss the stocks they're watching now.

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This video was recorded on Oct. 14, 2019.

Jason Moser: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market each day. It's Monday, Oct. 14th. I'm Jason Moser, and joining me in the studio today via Skype, Certified Financial Planner, Mr. Matt Frankel. Matt, how's everything going?

Matt Frankel: Pretty good. The weather is finally starting to turn for the better down here.

Moser: It's cooling off up here, too. Starting to feel good. I love the change of the seasons. I'm a fan of fall. It's a good time here. We've got earnings season getting ready to kick off. That means, shoot, man, for the next month, we'll have plenty to talk about. 

On today's Financials show, we're going to dig into some mistakes that you may want to avoid in purchasing rental property. We're going to have more of What's the last stock you bought and why. Of course, we'll have a couple of stocks for you to watch for the coming week. But Matt, let's lead off today's Financials show with a headline that we've been discussing recently. It also works right in nicely with an email question we got from a listener as well. But let's start with the topic here first. We're looking at some data here that tells us that CEO departures are on pace for a record year this year. It's worth noting, this is not just CEOs of publicly traded companies. This is CEOs of any company, private and public. It does look like this year, they are headed for a record year, as far as departures go. What do you make of this? We've seen some very high-profile CEOs stepping down from their positions, and there have been reasons for that. But when we look at this in general, 2019 seems to be a bit of a busier year when it comes to turnover in the executive suite. Wondering what you make of that.

Frankel: The report that we're looking at says that the primary reason has been either stepping down to hand over to a new leadership or for retirement purposes. The thing I read between the lines here is that over the past decade or so, we've seen a wave of start-up businesses, more so than in previous decades. You can see that with the IPO market this year. The cycle is coming to a high point, if you will. The previous high year for CEO departures was 2008. We all know what happened right then. Since that time, over the past 10 years or so, you've seen a lot of companies formed and grown to the point where they're bigger businesses now. This will tie into the email you're referring to. You're seeing all these businesses start to get bigger and bigger and mature. The original CEOs, in a lot of cases, seem to be stepping aside to let a more experienced management team take the reins. It's not uncommon in the start-up world. Of course, as we'll discuss in a minute, there are a lot of CEOs that have been with their company since day one and are still leading them today. We would never want that to change. It just seems like a byproduct of the start-up culture of the past 10 years.

Moser: You've keyed in on something there that's right. To put some numbers around this, according to this study from business and executive coaching firm, Challenger, Gray & Christmas, there were 1,160 CEO departures in 2019 through September. We're just coming up to the midpoint of October here. Through September, that's a lot. That seems like a lot, at least. To your point about the tech sector, or at least this start-up sector -- and most of those start-up companies are tech-related -- in the tech space, departures there are 21% higher than last year at this point. To your point, we have seen a lot of these start-ups, and as they mature, they start making this segue into a new stage of growth, perhaps, and maybe that's where the CEO that was helping them get to where they have gotten doesn't possess the same skill set required to keep them going further from there.

Frankel: Right. The WeWork CEO is a recent example. Pretty much after the IPO debacle -- we could spend the whole episode talking about that -- pretty much all the investors said, "You're not the right one to lead this company forward. Step down. We need somebody else in charge." That's not uncommon. That was just a high-profile case. That's really not an uncommon thing among rapidly growing, newer businesses.

Moser: Yeah. Beyond the idea that there's a CEO that perhaps isn't fit to take the company to the next level, we also saw, we are seeing, we have seen, a lot of turnover due to some misbehavior, some ethical concerns, some troubling behavior there. If we go back to 2018, in 2018, we saw quite a few CEOs who were forced out of their positions for ethical reasons. In fact, 39% of CEOs were forced out for ethical lapses rather than financial performance or board struggles. When you look at the CEOs who left in 2018, there were far more who were forced out for ethical lapses than for financial performance or board struggles. That number was up 50% compared to the number that was recorded in 2017. We have certainly seen, as social media has brought a lot of things to the forefront, misbehavior is not only being discovered more quickly, but it's clearly not being tolerated.

Frankel: Wasn't Uber one of the 2018 departures?

Moser: I think so. Travis was back in 2018, wasn't he?

Frankel: And these are things that weren't happening, like you just mentioned, prior to the emergence of social media. No one really paid attention to what CEOs were doing in their private lives, because all this stuff wasn't out there. Speaking broadly, our lives were less out in the open. If I said something silly now, someone has it on videotape. Years ago, that wasn't the case. And there's fewer high-profile people than CEOs of multibillion-dollar companies. It's not surprising that that's become a much bigger reason for CEO departures.

Moser: I tell you, let's go ahead and get into the listener email that we're talking about. This does segue nicely. It's an email we got from Jerry Lynch. Jerry says he's a happy Fool fan from Florida. Jerry, we're happy that you're happy and we appreciate you listening. Jerry writes, "The Motley Fool's focus on the importance of the founder-controlled public company raises the long-term question, when is it best in terms of market cap or market share, for the founder-CEO to turn over control to a professional executive team? My main concern is that the aging founder will choose a nepotistic option instead."

A few things to unpack there. First and foremost, let's look at when we think maybe it's appropriate for the founder-leader to consider handing over the reins to someone that is a bit more able to take the company to the next level. We've certainly seen examples like this in the past. Of course, we love founder-leaders, but a founder-leader might not always be the right choice for the company to be able to take that company to the next level. You have examples that go both ways there. What do you think there?

Frankel: I'm torn on that issue. There's a lot of founders that I hope never leave. Jack Dorsey I hope never leaves Square. I think he's one of the reasons that company has so done well and has jumped to the next level over the past few years. I'm pretty sure we could all agree that it has.

Moser: I think Reed Hastings with Netflix, another very good example. I can't imagine anyone else running that company.

Frankel: Right. I could go on with that. Could you imagine anyone but Elon Musk running Tesla?

Moser: [laughs] Well, personally, I'd put Tesla in that class where I think someone else should be the CEO there, but that's one man's opinion, Matt. We'll leave that for another day. 

Frankel: Well, no, that's a good point. The reasons why you probably think that are, one, his behavior. 

Moser: Yes.

Frankel: And two, some questionable business calls.

Moser: Yeah. I feel like Elon Musk is a great example of someone who's perhaps spreading himself a little bit too thin.

Frankel: And that's what I mean -- when it looks like someone's either making questionable business decisions or is getting to the point where they can't handle the entire operation by themselves -- Elon Musk, is in my mind, a borderline one. I just think his name is synonymous with Tesla --

Moser: I do agree with you there. It's hard to imagine Tesla sans Elon Musk. I could imagine it with him in a different leadership position, whether that's director something else. But, yeah, I do agree with you there.

Frankel: Another thing that we consider at the Fool, just to add to that email, we don't just want founder-led businesses. We want founders who also have a lot of skin in the game. It's important to mention that there's two sides to that. I want a founder that still owns 30% of the company, because their interests are definitely aligned with mine.

Moser: Yeah, that's a good point.

Frankel: I know of a few founder-led businesses where the founder owns, say, 1% or 2% of the company. That's not the same from an investor standpoint as a founder who still owns a third of the business. Mark Zuckerberg at Facebook, it's clear that he's led the company up several levels of the ladder. I'm not sure the exact percentage that he still owns, because it's not in my wheelhouse, but I know it's up there.

Moser: It's the controlling voting percentage, that's all that really matters. The buck stops with him.

Frankel: Right. And he still owns billions and billions of dollars of Facebook's stock, so if the company does better, he does better. I know he's not the most money-motivated person in the world, but it's still an alignment of interest issue. So, it's not just founder, it's a founder/partner, I guess you would say.

Moser: There's an interesting part of the question here. Jerry asks about in terms of market cap or market share. It's probably a bit more difficult to recognize a specific number where you feel like this person is suited or not suited to lead this company forward. I think it's a bit different for every situation. You look at something like Chipotle, for example, with Steve Ells. For the longest time, he could do no wrong. When everything was going right, Chipotle was lighting the world on fire. Ells had it all figured out. Then, slowly but surely, things started to fall apart a little bit. It became abundantly clear in time that he didn't have the full skill set to be able to take this company to the next level. I don't know that there was a market cap number that was in mind when we're looking at that from the investing perspective. We were looking at it, quantitatively speaking, from the presence of the market share of how many stores Chipotle had open. It was somewhere in the neighborhood of 2,000. Maybe a little bit under that. But it became clear that once they had become a national phenomenon with this big supply chain that they needed to manage, and messages they needed to communicate, and ongoing challenges that they always needed to address, that Steve Ells wasn't the guy that had either the skill set or the time or some combination thereof that was required to take that business to the next level. So, you fast-forward, you bring in Brian Niccol, and it's been an amazing comeback story for that company. I attribute some of that to the fact that Niccol had that exposure to the quick-service restaurant space with Taco Bell. He was able to bring over some of those philosophies, some of those ideas, that experience, and marry that into a strategy from Chipotle that, while it pursues a little bit of a different market in fast casual, a lot of those strategies still ultimately hold true. And we've got what we've got today -- a company that seems like it's rebounded nicely and is continuing that onward and upward trajectory.

Frankel: It's definitely a very fluid situation with a lot of these CEOs. Jack Dorsey, who I mentioned a little while ago, is another example. When Square first went public, for less than the initial price range that people thought it was going to price at, it languished at about $9 or $10 a share for a couple of years, you heard all these calls. "He can't manage both companies. He's not the one to take us forward." No one is saying that now. If anything, people are saying he should step down from Twitter and focus on Square. Like you said, when everything's going great, people have one thing to say, and when things are going poorly...you really have to take that with a grain of salt. It's a tough call. Do we let the guy see his vision through? Or do you put someone else in right away? 

Moser: That's where corporate governance comes into play. To the last part of Jerry's question there, "my main concern about the aging founder will choose a nepotistic option instead," I'm assuming that you're referring to someone directly related to the founder, Jerry. We don't see that all that often. Now, if you're referring to bringing someone up in the ranks, maybe they're not biologically family, but very close to the founder-leader in helping execute the vision from the very get-go, I can certainly see the concerns there. Again, it's a case-by-case thing. But you look at something like a Costco, where you've got Jim Sinegal, who was able to bring Craig Jelinek into the CEO role. Jelinek worked side by side with Sinegal for many, many years. If you consider that nepotistic, so be it, but it could be argued that Craig Jelinek has certainly kept that ball rolling for Costco, and investors have benefited as well. 

But nevertheless, very good question. Good things to think about. I hope we've shed a little bit of light on how we view that here. Certainly a topic that we'll continue to keep an eye on as it seems like CEOs continue to walk out of the door, in many cases this year. It's going to definitely be a record year for CEO departures, it looks like. 

Let's go over to the real estate side of the world here, Matt, and everything you guys are doing over there at Millionacres. You published an article recently on millionacres.com called "Five Mistakes I Made the First Time I Bought a Rental Property." Matt, when I saw this article, when I read the article, I thought, man. I've had experience as a landlord as well with the rental property. Now I will say, when we bought our property, we didn't buy it for the purpose of renting it. It was our home first. And then when we moved, we decided to keep it and rent it out. But the article was really well done. I could certainly empathize with a lot of things that you were talking about here as a homeowner in general. Talk about some of the things that you mention here in the article.

Frankel: I have to be honest, I almost didn't write the article in the first place because I thought, "Well, someone's going to read this and say, why is this guy the real estate expert if he did all these things wrong?"

Moser: Because he learned from his mistakes! [laughs] 

Frankel: That's the point. You live and you learn, same with stock investing. How many dumb investments have you made? I've made quite a few.

Moser: Oh, sure! We're making all of these mistakes for our listeners so that they don't have to make them. They're learning from us, Matt. It's a selfless act on our part.

Frankel: Out of all the mistakes on the list, the costliest one was not inspecting one of the units in a property. That sounds like a no-brainer. It is, but let me give you a little background of the situation. I bought a triplex. It's in trendier area near the University of South Carolina campus. I went to view it with my realtor. Two of the units I could walk into. They were OK -- not great condition, but when I was in my 20s, I would have lived there. The third unit I wasn't allowed to go in. That set off bells in my head so I asked why. And the excuse made sense. The tenant worked overnight. I could come back at night and view it if I wanted to. But I live about 45 minutes to an hour away from this property, and I didn't want to do that, so I never came back. And because my inspector only went there during the day, he wasn't allowed in there, either. Now, this was an as-is sale. It's a very hot market. We got in at what seemed like a really great price. And it was a good price. So, we let it go. I invested in this one with a partner. I left his name out of the article. After we closed, the tenant that was back there was gone. I sent my property back manager over to introduce herself, and the tenant was just not there. I got a call a few minutes later saying, "You have to come and see this." So I went into the unit, and I can't see how anybody lived there. I would rather live in a bathroom in the subway station. Grime everywhere. The carpet... they must have had 50 cats living there. There was a flea infestation that was out of control. I couldn't get more than three steps into the unit without fleas all over my legs. It was terrible. It was the worst place that someone actually lived in that I've ever seen. 

So, long story short, we got a bill for about $8,000 in damages that need to be taken care of before my property manager could even rent it out -- because they're not trying to be a slumlord, they're not going to rent out a disgusting place. That was $8,000 we hadn't budgeted for. This isn't a very expensive market, so $8,000 in repairs in one unit is a lot.

So, from that point, I have an unbreakable rule that I have to be able to inspect every unit. I need to read the leases to see if people have an out, I get contact information in an event like this. We didn't even know who this tenant was to go after them. That was one of the big mistakes. I won't go through all of them, but that was probably the one that was most costly and taught me the biggest lesson.

Moser: I can certainly relate. That was one thing I found when we were renting our property. We were doing it from another state. The property was in Georgia, we were here in Virginia. It became that much more important. The No. 1 mistake that you list in the article, trusting someone else's word on tenants, that is a very good point there. To go through the others real quick, just to make sure we give them mention. Giving yourself too little time to close. That makes sense. If you've been through any type of home purchase or sale, there's always something. There's a million items to check off and time is of the essence.

Frankel: Especially with an investment property. It can take a lot longer to get a loan for an investment property. I didn't know that as a first timer.

Moser: That makes sense. The bank is looking at that and thinking it's a little bit different than your primary residence, so they're going to take that into account. Not putting enough money in reserves. Being unprepared for repair costs. Not knowing peak rental season. I thought that was a really interesting one. Talk a little bit about peak rental season and what lesson you learned from that.

Frankel: I just didn't understand how much this varied from market to market. Like I said, it's a trendy area right near the college. I knew our tenants would be students, but I didn't think that after the second week of August, it would be impossible to rent. College students like to secure their housing in June, July, somewhere in there. Some will go into August. So, we closed on the property specifically in time to get it ready for the school year. But that one unit that needed $8,000 in repairs also needed three weeks to get the repairs done. 

Moser: I can imagine.

Frankel: So, it wasn't ready until school was already back in session. And if you have a two-bedroom unit on a college campus, students are your market. That's really it. All I could hope for was somebody to get kicked out of their own place so I could have a tenant move in.

Moser: Know your market.

Frankel: Yeah, know your market. Rental season depends where you are. If it's a family home, you're looking at early summer. That's when people want to move, when the kids just get out of school. Know your market. It depends on the area you're in and the type of property. Definitely something to think about that I didn't even consider the first time.

Moser: Very good points, certainly. For everything else you guys are doing over there, check out millionacres.com. We'll make sure to tweet that article out on the Industry Focus Twitter feed. 

Speaking of the Industry Focus Twitter feed, let's jump into another installment of What's the last stock you bought and why. This has turned into a nice little segment for us here, Matt. Man, our listeners love telling us the last stock they bought and why, and we want to hear it. We've got a few more for you today. We've got one from Jason Ruse, @rusebruise. He says, "GT. Low PE, low dividend, payout ratio. Every car on the road has tires, some more than four. Long-term forever hold, DRIPping more shares." For those of you not recognizing the ticker, GT is the Goodyear Tire and Rubber Company. Absolutely. Cars have to have tires, and they don't last forever. 

Frankel: Great portfolio staple.

Moser: Yeah, I like that. From Nate @nateduchiene. He says, "Very boring, but WAL." We're talking about Western Alliance Bank Corporation. Nate says, "Very boring but WAL. So cheap by the numbers right now." Thanks, Nate. 

Finally, we've got old school Mike @oschool. He says, "Last stock, MKC McCormick. Why? Because you told me to." Mike, I love it, man! I own it, too. I'm right there with you. Good purchase! I think that's one you'll want to own for a long time to come. 

Hey, listen, what's the last stock you bought and why? Make sure and drop us a line at [email protected]. Hit us up on Twitter @MFIndustryFocus. Let us know the last stock you bought and why, and we'll gladly read it on the show. 

OK, Matt, let's wrap up things here for the week. We've got as always, one for our listeners to watch. What is your One to Watch for the coming week?

Frankel: I am watching TD Ameritrade. We talked last week about how the brokers are slashing their commissions and how a lot of people think it's going to erase their profits altogether. I just don't think that's true. I think Ameritrade is actually in a really good position. It's got the best product out there, and now it's offering the best product among all of its competition at the same price as its competition. Whereas previously, it was even a little more expensive than the competitors. So, I think they'll actually have an influx of assets relative to their peers, and that it's a stock that you might want to consider looking at at these lower valuations.

Moser: I like it. Sounds like your dog likes it, too. 

Frankel: Yes, yes, she does. Sorry about that!

Moser: [laughs] That's OK. We're dog lovers here. The more, the merrier. My One to Watch, you may have seen the headlines here late last week, IAC, Interactive Corporation decided to go ahead and confirm what we thought they might do. They're going to divest their ownership in Match Group. Match Group is, of course, the company that owns a lot of those different dating properties. As it stands right now, IAC Interactive owns about 80% of Match Group. They're going to go ahead and divest that interest. That is not something that is a problem for IAC, because thankfully, they own a number of different brands and properties in the media space and elsewhere. They also own things like Angie's List and HomeAdvisor and Vimeo and Dotdash. The revenue is primarily generated from the Match business and ANGI Homeservices. But this is a company with a long track record of making a lot of great investments and then realizing a lot of great gains on those investments. Shareholders all along the way are winning as well. The three-year chart here, the stock's up 260%-plus. I think if anything, it's interesting that it gives investors a reason maybe now to own both Match Group and IAC if they want. 

As an example of a new investment IAC recently made, they dropped $250 million into the car-sharing marketplace Turo, which I think is really cool. You've got Barry Diller who's the chairman and senior executive. He's been with the company since 2010. Insider ownership just under 8%. I think that given the track record they've developed, the investments that they've made, IAC Interactive is a neat-looking business. I would not let the fact that they're divesting their interest in Match Group deter you from considering it as an investment. If anything, I think it gives investors maybe a reason to own both of them now. IAC, keep that one on the radar. 

Matt, thanks again for joining us this week! It's always great having you!

Frankel: Yeah, always fun to be here!

Moser: OK, as always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Today's show was produced by Austin Morgan! For Matt Frankel, I'm Jason Moser. Thanks for listening! And we'll see you next week!