Schafer: Holding CEO accountable is sign of a strong company

Don't look at the departure of Target CEO Gregg Steinhafel and conclude it's just another symptom of very sick company.

Asking Steinhafel to leave was actually a sign of just how healthy Target is.

It shows that it's way too soon for longtime shareholders, suppliers and employees concerned about the future of Target to panic. The board is paying attention and is willing to act, as should be expected from this company. Holding executives accountable for results is one of the reasons it rose from a regional department store to become an industry giant.

This is not to suggest that the decision to seek Steinhafel's resignation was a no-brainer or even easily reached. By many measures Target continues to be a solidly successful company miles from any sort of financial crisis.

Target last year made money, about $3.1 billion pretax, and that's after losing nearly $1 billion pretax on its big expansion in Canada. It paid dividends of $1 billion and bought back stock worth an additional $1.47 billion.

But when Target early Monday announced that "after extensive discussions," the board and its CEO had agreed that the company needed new leadership, it was not difficult to imagine what those extensive discussions were about.

The conversation could have been about a Canadian expansion in which sales have fallen wildly short of plan. Had it been a business school project, the forecasters would have flunked.

The conversation may have rolled around to the core business of U.S. retailing, another topic that would have been uncomfortable for the CEO.

Comparable store sales in the United States were up slightly for the first three quarters of the last fiscal year, but with a continuing slide in how many consumers come into stores to shop.

Target's two biggest initiatives of recent years, a loyalty credit card with a 5 percent discount and a full section of groceries, have both been implemented, so why is it the customer count only seems to go down?

Then came Target's fourth quarter, when Target confirmed that up to 40 million customers' credit and debit card information had been lost to hackers. That stunning news was more than enough to spoil the results from the traditionally strong fourth quarter.

These problems may sound more like short-term setbacks that shouldn't end the career of a CEO, but these setbacks were not just isolated events that made 2013 a "bad year." And there were enough of them to get any director's attention.

Some of the directors perhaps remember technology issues that cropped up well before the fourth-quarter data breach, such as when Target brought its target.com e-commerce business in-house.

In its first three months after the late summer 2011 launch, target.com accounted for more than half of the major outages at the top 100 e-commerce sites, including a famous collapse following a surge of traffic from shoppers looking for fashionable Missoni products.

When the site crashed again a month later, Target that day announced that target.com's president, Steve Eastman, had left the company.

So it's no surprise that the executive in charge of technology at the time of the data breach, Beth Jacob, also is no longer an employee of Target.

While Steinhafel wasn't the one to pick the hardware and software that allowed the data breach and target.com debacles, each would still belong in the discussion when directors looked at the body of the CEO's work.

Could it be that Target didn't spend enough money on information systems and the people to run them? It sure looks like it. That's not a technology decision, that's a strategic priority decision.

It's a CEO decision.

Deciding to hold the CEO accountable for the results of these kinds of decisions remains rare. The search firm Spencer Stuart tracks turnover in S & P 500 companies, and in its most recent data, only a small percentage of the CEOs who left their jobs did so under pressure.

It's important to remember, however, that it's actually happened before at this company.

The CEO at the time was Ken Macke, leading a company then known as Dayton Hudson Corp. While the company in 1994 said he had retired, Macke later told friends a more complete story of how he lost his job.

The company operated as three divisions then, with Target being both the largest and the engine of revenue and profitability growth. The company had pledged to improve the results of its other units, and in 1993 the profitability at one of them had once again slipped.

Macke was a merchant, with an intuitive sense of what the customer would want and how she would feel walking in to one of his stores. Old hands described him as having a bit of skepticism for the kind of data that's now called "metrics."

But Dayton Hudson was not run by the seat of anyone's pants, least of all its CEO's. Its corporate governance practices were so well-regarded that its intensive CEO evaluation process became a 1991 Harvard Business School case study.

That is the system Macke grew up in. Director independence, rigorous oversight, accountability for performance — Macke was described as a true believer in all of these things. He believed in the system that ended his career.

How many of the securities analysts looking at news of Steinhafel's departure this week know that history isn't clear, but many sure didn't see the end of Steinhafel's Target career coming. They used terms in their research notes early Monday like "abrupt" and "surprising" to describe the news.

Several mentioned an April invitation to a meeting Steinhafel would be hosting on May 30. Somebody preparing to move on doesn't first schedule a day with securities analysts.

But there's at least one Target employee who couldn't have been completely surprised. That's Gregg Steinhafel.

He was a young M.B.A. grad from Northwestern University's Kellogg School of Management when he joined Target as a merchandise trainee in 1979. He stayed for 35 years.

He knows how the system works at Target.

lee.schafer@startribune.com • 612-673-4302