Former Starbucks CEO Howard Schultz’s deep entanglement with the company risks creating a corporate governance mess.
Starbucks has changed the in-store system it uses to deliver coffee to customers, and employees aren’t happy. “I’m sensing that this is the end of Starbucks,” wrote one employee on Reddit. “We’ll be turning into McDonald’s before long… I give it 6 months,” wrote another.
So what? Disgruntled baristas are just one item on a long list of troubles facing CEO Laxman Narasimhan. This week, the coffee giant posted a decline in sales for the second consecutive quarter, as demand fell steeply in China and the US. Narasimhan, who took over last year during a protracted battle with the company’s biggest union, also needs to deal with
- his predecessor, Howard Schultz, who ran Starbucks for most of the last four decades and has fallen into a habit of publicly criticising its leadership;
- Elliott Investment Management, an aggressive investor activist that has built a large stake in the company and is privately pushing for board seats; and
- the share price, which is down a quarter since he took over.
Second shot. Much depends on how Narasimhan, who used to run Reckitt Benckiser, handles negotiations. Elliott’s involvement offers cover to relaunch a strategy that will “really attack the occasional customer” and access to the activist’s rolodex could prove useful if there are plans to beef up the board. A breakup of the $85 billion business wouldn’t unlock more value and Elliott isn’t (yet) calling for Narasimhan to be ousted. The same can’t be said for Southwest Airlines, where the activist firm has launched a $1.9 billion campaign against the longstanding CEO.
Caffeine addiction. The more destabilising force is Schultz, who, after three stints as CEO, just can’t quit the brand he helped to turn into a byword for global capitalism. He is and remains:
- the company’s 6th largest shareholder with a $1.6 billion holding;
- “chairman emeritus for life” (with accompanying parking spot); and
- a major shareholder in Starbucks’ sole supplier of olive oil, to which it paid $26 million between October 2022 and September 2023.
Despite professing he has “no desire or intent to return” as CEO, spectators are sceptical. One research firm expects him to be back in post in 2025. Narasimhan was handpicked by Schultz – but the quasi-founder’s deep entanglement with the company risks creating a corporate governance mess:
- In May, Schultz took to LinkedIn to opine about the company’s poor earnings quarter, accusing senior leadership of a “fall from grace” and for not spending “enough time with those who wear the green apron”.
- Then, on a recent episode of the Acquired podcast, he said that hubris was a “disease which has happened to Starbucks”.
- Now he’s opposing a reported settlement between Elliott and Starbucks that gives the activist board seats in exchange for support for Narasimhan. According to the FT, he has made his distaste known to other board members.
Time to smell the coffee? Starbucks’ woes weren’t unforeseen. Inflation-squeezed consumers aren’t the brand loyalists they used to be; just look at McDonald’s recent batch of below-par results. China – which was always Schultz’s ultimate target – hasn’t developed the fondness for frappuccinos the company would have hoped for, and local competition has made a troubling dent in sales.
The bigger question is one of oversight. Narasimhan was dealt an inevitably tough hand: one PwC study found executives who followed longstanding CEOs had annualised total shareholder returns four percentage points lower than their predecessors. But boomerang bosses like Schultz have risks too – especially when they’re awarded the free rein of a founder. If the events of this summer have one lesson, it would be that succession comes eventually – and it’s best to be prepared.
