SAP: Germany’s most mysterious CEO change

  • SAP CEO Bill McDermott leaves with a Push-out Score of 8
  • Nine of the 30 Dax CEOs have announced their departure in the past 24 months
  • Jennifer Morgan is the first woman ever to lead a company in Germany’s blue-chip index

(exechange) — October 11, 2019 — Corporate Germany is in turmoil. A wind of change is blowing for CEOs in Germany’s blue-chip index Dax. No fewer than nine of the 30 Dax CEOs have announced their departure in the past 24 months. Most of them were apparently under pressure to go.

BMW AG, HeidelbergCement AG, Daimler AG, Beiersdorf AG, Volkswagen AG, Deutsche Bank AG, BASF SE and Deutsche Börse AG have announced CEO changes since October 2017.

Here comes number 9: SAP SE announced on Thursday, October 10, 2019, that William R. (Bill) McDermott is stepping down from his position as chief executive officer at the software company.

Was he under pressure to leave his post?

The Push-out Score of the research firm exechange, which gauges the pressure on outgoing CEOs on a scale of 0 to 10, shows a value of 8 for McDermott’s move, indicating strong pressure.

His departure is the most mysterious CEO change of a German blue chip in the past two years.

Almost all criteria of the analysis model suggest that McDermott was under intense pressure to leave his post as CEO.

The age of McDermott of 58 years is relatively low, and precise information regarding his future plans was not immediately available. That’s the first point for the Push-out Score.

The change is effective immediately. Point number 2.

The stock price performance leaves room for improvement. The announcement follows a decline in SAP’s share price of 16% since July 2019. Point 3.

The reason for the leadership change is not completely understandable. Point 4.

A reason for Bill McDermott’s departure from the CEO post was not explicitly provided. SAP said: “Bill McDermott has decided not to renew his contract and is stepping down from his position as chief executive officer. In activating the company’s long-term succession plan, SAP Executive Board Members Jennifer Morgan and Christian Klein have been appointed co-chief executive officers, effective immediately, with the approval of the supervisory board of SAP SE.”

Jennifer Morgan becomes the first woman ever to lead a company on Germany’s Dax.

McDermott will remain in an advisory capacity until the end of the year to ensure a smooth transition.

The circumstances of the management change are challenging. Point 5.

McDermott’s departure follows the entry this year of activist investor Elliott Management Corp.

SAP earlier this year announced a nearly $1 billion restructuring program, including plans to cut about 4,000 jobs.

McDermott’s departure comes almost exactly a month after Oracle Corp. announced that one of its two CEOs, Mark Hurd, is taking a leave of absence for health reasons.

SAP on Thursday also pre-announced third-quarter results and beat expectations, providing strong arguments for the fact that there are no acute operational problems behind the abrupt leadership change.

At the same time, the succession plan raises questions. Point 6.

The duties of Bill McDermott will be taken over by Jennifer Morgan and Christian Klein as co-chief executive officers, effective immediately.

It remains to be seen whether this is a sign of continuity.

Investors don’t know what changes Morgan, 48, and Klein, 39, might push for.

While SAP has had a co-CEO structure before, power-sharing arrangements like that can lead to conflict.

The form and language of the announcement provide points 7 and 8.

In the announcement from SAP, which is based in Walldorf, Germany, Bill McDermott receives accolades, praise and thanks, but no word of regret and no good wishes.

Hasso Plattner, chairman of the supervisory board of SAP, did not say many words regarding the long-standing chief executive Bill McDermott: “SAP would not be what it is today without Bill McDermott. Bill made invaluable contributions to this company and he was a main driver of SAP’s transition to the cloud, which will fuel our growth for many years to come. We thank him for everything he has done for SAP.”

McDermott said 127 words, but his statement did not reveal what exactly triggered his sudden and surprising move. He said: “Every CEO dreams of being able to transition a company to its next generation from a position of significant strength. When you look at where we were and where we are, I simply could not be prouder of what this company has achieved over the past decade. I am thankful for the opportunity to lead one of the world’s finest companies. Now is the moment for everyone to begin an exciting new chapter, and I am confident that Jennifer and Christian will do an outstanding job. I look forward to supporting them as they finish 2019 and lay the foundation for 2020 and beyond. To every customer, partner, shareholder and colleague who invested their trust in SAP, I can only relay my heartfelt gratitude and enduring respect.”

Conclusion: Age, notice period, share price development, official reason, circumstances, succession plan, form of the announcement and language in the communication raise eight red flags. Only McDermott’s sufficiently long term of office as CEO of nine years and eight months (as of October 10, 2019) prevented the score from climbing higher.

SAP did not immediately respond to a message seeking comment on the score.

SAP did not provide any plausible explanations for the abrupt change and thus opened the door to speculation.

Occam’s razor invites us to choose the simpler of two explanations for a phenomenon.

On the one hand, the notion that the leadership transition is the result of a long-term succession plan is implausible in eight different ways.

On the other hand, the constellation of facts surrounding McDermott’s departure is much easier to reconcile with the hypothesis that, for compelling reasons, he could not remain at the helm of the company for as long as originally planned, and that he subsequently stepped down from his post with immediate effect, prompting the board to activate the company’s long-term succession plan much earlier than originally intended.

It is unclear whether McDermott surprised the board, whether the board surprised McDermott, or whether both surprised each other.

However, it is obvious that not only investors were surprised by the abrupt leadership change, but also McDermott’s successors.

In comparison with the eight other CEO changes in the Dax, McDermott’s departure stands out.

Matthias Müller of Volkswagen AG, John Cryan of Deutsche Bank AG and Carsten Kengeter of Deutsche Börse AG had to leave under extreme pressure, each leading to Push-out Scores of 10.

Kurt Bock’s departure from BASF SE (Push-out Score: 2) seemed smooth, while Dieter Zetsche’s resignation from Daimler AG (Push-out Score: 4) and Stefan Heidenreich’s exit from Beiersdorf AG (Push-out Score: 6) appeared ambivalent. Harald Krüger of BMW AG (Push-out Score: 7) was obviously forced to go.

Bernd Scheifele’s planned departure from HeidelbergCement AG (Push-out Score: 0) seemed perfect.

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