Why Groupon Has Six Months or Less to Find a Permanent CEO Replacement

In late 2011, Groupon, the daily deals company, went public in a glittering debut. But it quickly began to lose luster, and after abruptly ousting its founding CEO, Andrew Mason, last week, the VCs who invested in the company probably wondered whether they would have to write down their carrying value for the company yet again.

According to experts, they should be more worried whether Groupon will be worth anything at all. Groupon has “three to six months” to find a permanent CEO given its “precarious position, with its business model under serious challenge,” says Ken Favaro, the global head of Booz & Company’s enterprise strategy practice.

Clearly, bringing in Eric Lefkofsky and Ted Leonsis — the company’s executive chairman and its vice chairman, respectively — to lead the company can only be a short-term solution. Gary Ballinger, an associate professor of commerce at the University of Virginia, has extensively researched interim CEOs, and according to a study of more than 500 of them that Ballinger and a colleague conducted several years ago, “Once the interim CEO job lasts more than two or three quarters, the damage in terms of [return on assets] relative to firms [with permanent CEOs] gets more and more pronounced.”

The reasons that interim CEOs are less than optimal are legion. “There are always ripple effects” involved when a founding CEO is replaced, notes longtime Silicon Valley recruiter Bill Beer of Daversa Partners. “At a private company, the change might impact customers’ buying decisions. At both public and private companies, you’re also running the risk of major turmoil at the staff level. People get really nervous when they’re about to get a new boss.”

This staff turnover can be particularly dangerous. “When key executives leave, it poisons the well for new executives and becomes harder to keep the right people on board,” says Ballinger. “With Mason gone, the rest of the managers are the group you have to worry about.”

Given that Groupon has been flailing on the public market for six straight quarters and was reportedly looking to replace Mason months ago, it isn’t clear why the company fired Mason without lining up a permanent CEO.

Sometimes, companies like Groupon are unable to groom a successor because the sitting CEO has scared off candidates or given them impossible jobs, then fired them. Or, as Ballinger notes, “An experienced executive might say, ‘I’m good enough to get a job someplace else.’”

The end result is a bad situation that only grows worse with every day the CEO role remains empty. “I don’t think Groupon faces inevitable doom,” says Ballinger. “But the longer it goes [without a replacement for Mason], the bigger the risk that people inside will either sit there and do nothing, or rush for the exits.”

For Beer, who works with both private and public companies, it’s déjà vu all over again. “We see this all the time. Companies stick with someone hoping they’ll turn it around. Sometimes, you don’t know [until it’s too late] that you’ve missed your golden opportunity to make a change.”

Image Credit: Shutterstock.com