The Fall of a CEO - Robert Knowling from Cowad Communications

Chief Executive, The, Dec, 2000 by C. J. Prince

Looking down from his perch at Covad Communications, Robert Knowling's future seemed very bright indeed. But in the blink of an eye, the game was over. And his abrupt resignation--like the dozens of other CEO oustings in the past 12 months--has left some wondering if any CEO is safe from the epidemic.

Things were good for Robert Knowling in the summer of 1998. The 45-year-old became CEO of Covad Communications at a time when the young DSL provider was poised for colossal growth, with grand plans to march into multiple metropolitan regions throughout the U.S. True, other scrappy startups were grabbing for pieces of the pie, including Rhythms NetConnections and NorthPoint Communications, but the high-speed data communications market seemed to have enough gold in its hills for everyone.

The market was expected to grow by leaps and bounds--or to between $15 billion and $18 billion by 2003, according to Deutsche Banc Alex. Brown estimates. Forrester Research forecast 27 million users with high-speed Internet access by 2003. Add to that the expectation that transoceanic telecom capacity would increase by more than 500 percent from 1999 to 2001, according to international telecommunications research house TeleGeography, and the potential for growth was positively mouth-watering.

Knowling, a former U.S. West executive who had been playing in the telco space since 1977, got Covad off to a running start, bringing much-sought-after high-speed Internet access to businesses in city after city through deals with ISPs, such as Prodigy and Earth-Link, and affinity groups, such as Gateway and telecom carriers. In 2000, the CEO ably locked up several line-sharing agreements--which represented critical cost-savings vs. the expense of running second lines to consumer homes--with incumbent local exchange carriers (ILECs), including U.S. West, Bell South, and Bell Atlantic. In March 2000, Covad's shares were trading at around $66 and most analysts were pushing the stock, rating it a strong buy. Things looked good, indeed.

And then trouble came to call. A series of missteps, miscalculations, and financial surprises--coupled with telecom tumult and mayhem on the Nasdaq--sent Covad's stock right into the ground. Just 27 months after he was aggressively courted away from U.S. West, Knowling resigned, ending a fast and furious ride that left the company at suspicious odds with Wall Street and its share price in smoldering ruins.

As it turns out, this abbreviated CEO cycle--from golden boy to sullied scapegoat--is gaining a familiar ring. Covad's hapless CEO is just one of dozens--including Xerox, Lucent, Gillette, Campbell, Maytag, and Procter & Gamble-to fall victim to what appears to be a growing epidemic in the new century.

The cavalcade of failures underscores a trend that experts say was overdue. As long as stock prices continued to surge despite zero profits, negative earnings, and soaring losses, investor patience for profitability seemed infinite. But the ballooning of valuations in '98 and '99 set industry up for a hard fall--and indeed, the giants are falling faster than ever. (At Chief Executive, we consider it a sign of the times that the presses had to be stopped on CE'S December cover story profiling Knowling, as his resignation came just days before the issue was scheduled to print-a first in the magazine's 24-year history.) Board members today, hell-bent on protecting shareholder interests, not to mention their own skins, are sending a message with their swift, and some say precipitous, action: CEOs, beware--make one mistake too many and you won't have the chance to make any more.

A Multitude of Shooting Stars

The timeline from first warning to final exit is shrinking noticeably. While Knowling's tenure at Covad might be considered brief by conventional standards, consider, Rick Thoman's paltry 13 months at Xerox, Lloyd Ward's 15-month stint at Maytag, and Michael Hawley's 18 months at Gillette--a company to which he'd devoted 40 years. It seems 2000 was a year of reckoning for CEOs in all industries, as shareholder intolerance in the high-tech sector began leaking into more traditional markets, causing boards to take a harder-than-usual line with CEOs.

But the current trend may simply be a return to normalcy, or, if nothing else, a natural extension of the frenetic Internet age. Fast times call for fast-moving CEOs. A closer look at the Covad story, critics say, reveals just cause for the change. First, while Covad's subscriber line count rose from 16,000 to more than 200,000 under Knowling's watch, and revenues increased, so, too, did net losses. It was a pattern that investors in the ravaged tech sector had likely tired of by the time Covad announced a first quarter 2000 net loss of $107.2 million, up more than 50 percent from losses in Q4 1999. So when Knowling announced Covad was going to spend about $200 million to buy BlueStar Communications, a provider of DSL in second-tier markets in the Southeastern U.S., even its loyal investors recoiled, hammering the company's stock down 27 percent that day alone, and blowing out nearly $1 billion in market cap.