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Starbucks’s tall order on CEO succession

Starbucks chief executive Howard Shultz, left, hands over the key to the original Starbucks store in Seattle to the company's president and chief operating officer, Kevin Johnson, at the annual shareholder meeting on March 22. (Jason Redmond/AFP/Getty Images)

Will the third time be the charm?

Starting Monday, Starbucks will begin answering that question when it officially hands over the coffee company's reins to Kevin Johnson, its president and chief operating officer, marking only the third time the top job will be held by someone else at Starbucks in the nearly 30 years since Schultz first became chief executive.

Seventeen years ago, Schultz handed the title to Orin Smith, a longtime company insider, and five years later, it went to Jim Donald, a former grocery executive who'd run the company's North American operations. Schultz stayed on as chief global strategist and chairman, yet he remained actively involved — a vocal chairman who spoke out on earnings calls, kept the same physical office at headquarters and penned a famous leaked email in 2007 about how the Starbucks brand had become commoditized. Amid a global recession, the board fired Donald, and Schultz returned to the job in 2008.

As Schultz sees it: “There is no more important responsibility for a CEO of a public company than to get succession planning right.”

Howard Schultz hands the keys to his successor in an emotional investor meeting

Now, Schultz and Johnson will again attempt one of the most delicate transitions in all of business: The handoff by an iconic, wildly successful CEO or founder to a successor. It's a paradigm of its own, fraught with potential for ego clashes and muddled lines of authority, and one of corporate America's most precarious high-wire acts. For founders and CEOs closely associated with a brand's success, their identities “are often hyphenated with the enterprise,” says Jeff Sonnenfeld, a professor at the Yale School of Management.

Schultz, for his part, says he's ready. Asked in a recent interview whether he'll find it hard not to meddle, he said “I don’t think it’s going to be challenging at all. Kevin and I have laid out a very specific level of understanding between us in terms of role and responsibility and I’m going to respect that.”

That division of specific roles and responsibilities is also what observers say could help the succession stick this time around. Schultz has carefully outlined what he plans to spend his time doing in his post-CEO role: Running the company's premium Reserve brand and shepherding its Roastery locations, the company's new sprawling tasting-room style temples to coffee.

In addition, he'll continue to lead the company's social impact initiatives, such as hiring refugees across its global locations and offering college benefits to baristas. “He’s got meaningful projects to work on, something he’s really impassioned about,” said Sonnenfeld, who described Schultz's role in the first CEO handoff as less well-defined.

Steve Mader, a managing director with the executive search firm Korn Ferry, agreed that when many founders or high-profile CEOs pass the reins, they don't have such a specific mandate. “They come to work every day, but they basically find themselves as a quasi-supervisor of the CEO, working old relationships,” he said. “What’s often going on when a founder leaves is an experiment in leaving his or her post.”

Mader, who says he knows Johnson well, also believes the duo have complementary skills. Johnson is the former CEO of Juniper Networks, so his tech background versus Schultz's retail and services history will come in handy. "They learned to work together as CEO and COO, and their skill sets are so different I don’t think they’ll have any trouble carving their jobs out," he said.

But it doesn't always go so well. Business history is littered with stories of iconic CEOs who clash with their successors. One recent example: Ralph Lauren handed the CEO title to outsider Stefan Larsson, but the two couldn't agree on creative direction for the fashion brand and Larsson is leaving the company less than two years after he started.

Jason Schloetzer, a professor at Georgetown University who studies CEO succession, says the indefinite nature of Schultz's executive chairmanship is unusual, as are the responsibilities Schultz will retain. “This is a lot of detailed involvement for someone who's relinquished day-to-day operations,” he says.

Yet it can also work well. Sonnenfeld cites examples such as Microsoft's Bill Gates or Intel's Andy Grove, saying both were iconic CEOs able to remain in the post while carving out distinct strategic roles from their successors. “The conventional wisdom is they should move on,” he says. “But the conventional wisdom is often wrong if they can define a meaningful role.”

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Investors, for their part, are glad to see Schultz remain actively involved, says Sara Senatore, an analyst with Sanford C. Bernstein. The company is growing fast in China and rolling out a host of new digital and retail initiatives, but U.S. sales have missed analyst expectations five quarters in a row, and the company trimmed its full-year revenue forecast in January.

“Schultz's presence is far more likely to be viewed as a positive than a negative,” she said. “If he were to segue entirely, investors would view that unfavorably.”

Having been through this before, Schultz has also surely learned something about the succession planning process. He told the Harvard Business Review in 2010 that “in all fairness” to [former CEO] Donald, “I don’t think I did that well.” (In an email, Donald declined to comment on his experience or the current succession.) And in “Onward,” a book Schultz wrote in 2012, he acknowledged that being a chairman was “like a parent standing back and watching his children make their own choices,” one that “had its unique emotional challenges” for him.

Now, Schultz says he — and Johnson — are ready. He said he's involved the leadership team more in this transition to help them feel they had a stake in the outcome. And he says he's learned the value of having his successor spend more time learning from the inside — Johnson was COO for two years but has been on the board for seven.

With this succession, “I was much more deliberate and thoughtful,” Schultz said, “by taking a longer view of how to do this in a way where there would be no pressure to assume the level of responsibility until there was the proper immersion and the opportunity to really understand the company from the ground up.”

Meanwhile, Schultz has said he is more prepared on a personal level. Emotions about the handoff, he said, would probably come when he was onstage at the annual meeting March 22 rather than on the official day. “We’ve been planning this for so long,” he said. “I feel very comfortable in my own skin with regards to the decision.”

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