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Add COOs to the Endangered Species List; Waning Demand for Operating Chiefs Means Just 35% of Big Companies Have One

Add COOs to the Endangered Species List

Waning Demand for Operating Chiefs Means Just 35% of Big Companies Have One

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RACHEL FEINTZEIG

Updated June 12, 2014 7:42 p.m. ET

Is the chief operating officer becoming an endangered species in American corporations?

Twitter Inc. TWTR +3.52% said on Thursday it would divide the duties of its chief operating officer among current managers after Ali Rowghani abruptly stepped down from the post.

He became the latest casualty in a yearslong trend toward executive suites without operating gurus. Instead of these generalists, who often run a business day-to-day while waiting for a chance to ascend to the top spot, companies are giving specialists in fields including risk and information management a direct line to the CEO. Companies also are leaning more heavily on finance chiefs.

The share of large companies with COOs has declined almost every year since 2001, according to an annual analysis of companies in the Fortune 500 and the S&P 500 by search firm Crist|Kolder Associates. The most recent report, which includes data from 2013 and examined 668 companies, pinned COOs at their lowest level, 35.2% of companies.

Industrial and health-care companies are least likely to have a COO, the report found, but recent examples of companies shedding the role include those in food service, retailing and technology.

Mr. Rowghani had served as Twitter’s COO since 2012, when he was promoted from the CFO job. His departure from the San Francisco company came amid a clash with CEO Dick Costolo over a plan to strip away some of his key responsibilities, a person familiar with the matter has said.

In March, McDonald’s Corp. MCD -0.66% and jeweler Tiffany TIF -0.93% & Co. also disclosed they were ditching the position. McDonald’s plans to split the duties between its finance chief and chief brand officer when COO Tim Fenton retires June 30. McDonald’s said it wouldn’t rule out a future COO. At Tiffany, where James Fernandez is both operating and finance chief, only the latter job will be filled upon his retirement.

The operating role had been a steppingstone to the CEO post at McDonald’s. Don Thompson, the fast-food chain’s current chief, served as COO from 2010 until his promotion in 2012.

In perhaps the most high-profile COO departure recently, Yahoo Inc.YHOO +0.41% parted ways with Henrique de Castro in January, reportedly because of disappointing advertising results and clashes with chief Marissa Mayer. Ms. Mayer said at the time that she would take on some additional responsibilities on the sales side. A spokeswoman for Yahoo declined to comment.

COO “just seems to me kind of an antiquated position,” said David Larcker, a corporate governance professor at Stanford Graduate School of Business.

Companies are “slicing out” their COOs in an effort to eliminate hierarchy and control the costs of an extra layer of management, Mr. Larcker said. Often, COO jobs are handcrafted for specific executives as a “prelude to promotion,” he said, but postrecession, leaner is seen as better, and a post with a murky job description may not be viewed as necessary.

Donald Hambrick, a management professor at the Smeal College of Business at Pennsylvania State University, says companies should be reluctant to wrest important responsibilities, like strategy implementation, from the CEO. When the boss is the “idea person” and the COO is the one charged with making those ideas happen, it allows for finger-pointing, he said.

A 2004 study that he co-wrote found that companies without COOs tended to perform better than companies with them. On average, businesses with the role made tens of millions of dollars less in annual profits than comparable businesses without the position, he said.

As COOs fall out of favor, finance chiefs are gaining more responsibility and a clearer path to the top job. The number of CEO hires with finance experience rose to 22.1% last year from 13.2% in 2012, according to the Crist|Kolder report. Nearly 28% of last year’s CEO hires had some financial experience.

This week, Hartford Financial Services Group Inc. HIG -0.97% named CFO Christopher Swift as CEO. Rent-A-Center Inc. RCII -2.11% ‘s former finance chief, Robert Davis, took over the top spot earlier this year. And at Target Corp.TGT +0.28% , John Mulligan is acting as interim chief after the resignation ofGregg Steinhafel.

To be sure, powerful COOs remain. Facebook Inc. FB -2.27% ‘s Sheryl Sandbergis one of the most prominent executives in technology, and her hiring was seen by many as a counterweight to Chief Executive Mark Zuckerberg‘s relative inexperience. She also is the social network’s best paid executive.

Many chief operating officers are still finding their way to the top: Last year more than 40% of CEOs came directly from the COO role, according to Crist|Kolder.

 

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About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (www.moatreport.com), a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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