OAK BROOK Ill. While the announcement Tuesday of the retirement of McDonald’s chief operating officer Ralph Alvarez surprised the analyst community, many expressed confidence in the quick-service chain’s ability to seamlessly replace him.
McDonald’s, which has faced the sudden loss of leadership before, has a deep bench of experienced executives and leadership development practices, observers said, noting that the issue of succession planning is under increased scrutiny by the Securities and Exchange Commission.
“The surprising news that McDonald’s chief operating officer, Ralph Alvarez, will retire at year-end because of orthopedic health issues, including two recent knee replacements, is a negative development, but one that CEO Jim Skinner and a strong overall management team can handle,” said Joseph Buckley, a securities analyst with Bank of America Merrill Lynch, in a research note.
Buckley noted that Alvarez had been in obvious pain the last time the two spoke at an investor conference. He and several analysts had speculated that Alvarez would have been the successor to Skinner as chief executive one day.
During executive shakeups like this, questions of succession planning could negatively affect a company’s stock price, debt ratings or other factors of shareholder value, said Bruce Sherman, principal of Chicago-based Integral Advisors LLC.
However, he said, McDonald’s has proven it can bounce back from unexpected transitions. The company named Skinner chief executive in 2004 after Charlie Bell had to step down from the post upon announcing he had colon cancer. Bell, who died in 2005, had taken over for Jim Cantalupo earlier in 2004, when Cantalupo died of a heart attack.
“McDonald’s is very deep,” Sherman said, “and they take this topic of succession as serious as any company. They probably won’t feel too much of an impact.”
Succession planning is more important than ever, Sherman said, given recent changes happening at the SEC. The commission recently released a bulletin detailing a change in policy that requires companies to show proof of leadership depth and succession planning when investors request it, Sherman said.
“That’s a big change,” he said. “Many boards right now are scrambling to get their houses in order. Now, because of issues around corporate governance, with companies like Bank of America and General Motors seeming like they got blindsided, [the SEC] feels shareholders and the public have more of a right to know, so now they’re backing the shareholders.”
Sherman is one of several industry watchers to point out McDonald’s roster of experienced operators. Because leadership development has been such a large part of the company, he said, the company is unlikely to need to hire an outside executive who might not embrace the corporate culture and could command a higher salary.
“McDonald’s promotes from within, and that’s a sign that they don’t have to go outside,” he said. “They have enough capable internal people.”
McDonald’s has not announced plans to name a successor as COO. For now, the regional operations presidents who had reported to Alvarez will report directly to Skinner. Analysts have speculated that three of those regional presidents — Don Thompson, leader of the U.S. region; Tim Fenton, Asia; and Dennis Hennequin, Europe — are the favorite candidates to become COO when McDonald’s eventually fills that spot.
Walt Riker, vice president of corporate media relations, said the company has functioned over the past few years with a COO and without, so there’s no hurry to name a successor for Alvarez. He added that Skinner has no plans to retire soon and has a working relationship with all the regional presidents now reporting to him.
“We have highly experienced leaders around the world,” Riker said. “They’re tightly aligned with Jim and corporate strategy.”
McDonald’s share price finished down $1.05 in trading today to close at $62.49. The Oak Brook, Ill.-based chain, which operates or franchises more than 32,000 restaurants worldwide, tentatively plans to release November sales results before market open on Dec. 8.
“There’s an opportunity for a lot of companies to get their act together, that’s the moral of the story,” Sherman said. “If McDonald’s were not as prepared — many other companies’ stock price would have taken a hit, but McDonald’s probably won’t miss a beat.”
Contact Mark Brandau at [email protected]