CEO's Who Need to Go: John Mackey of Whole Foods (WFMI, OATS, KR)

Calling for a CEO to leave a company or to be fired is not an easy task, and many market pundits demand a management change far too soon and far too frequently.  After reviewing all the data, one final outcome is becoming more and more clear: John Mackey of Whole Foods (NASDAQ:WFMI)needs to step down.  If he doesn't resign completely, he needs to at least turn over his CEO badge pending the SEC investigation and internal review.  This would allow him to remain as non-executive Chairman, would allow him to remain somewhat in control, and would send a better message to shareholders.

First and foremost, this anonymous message board posting issue is not the sole reason.  But it certainly is the final reason.  'Rahodeb' was his online alias, but it might as well have 'toidiel' and there is the full 1394 or however many posts it really was.  When this story first broke last week Mackey's position as an 'effective leader' was questionable.  Now it is probably set.  Online stock message boards are no place for officers of public companies to make anonymous commentary, particularly when criticizing competitors or trying to pump their own public company.

Last week we noted that the SEC was going to be looking into this almost immediately, and that has come about.  It would be easy to say that Mackey could wait and see what the SEC does, but the thought of a public company CEO making online message board posts anonymously makes one question more than just the results of an SEC determination or internal investigation.  The SEC could pen a formal policy against this practice of anonymous web posting by public company officers, even if they end up effectively 'no-billing' Mackey because precedent is lacking.  This is potentially a Reg. FD violation of the strangest kind, and this 'could' open the company up to legal suits from more angles than may be covered by the company's insurance.  If you were an insurer, would you tell a corporate officer that they are on their own because of this type of action?  I have asked an attorney about this and he thinks that may not be the case, but it could certainly be an instance where an insurer decided to test the limits of backing away from a claim or at least try to file for an exclusion.

Wild Oats' (NASDAQ:OATS) board of directors could theoretically take the option of not only telling Whole Foods to go away if it chooses to do so, it may even have the option of suing Whole Foods for cash damages.  The comapny may not do anything, that's for them to decide. How do you think Mackey will like hearing this question over and over: "Sir, could you please read this post again to the jury?"  If you review some of the postings he made speaking about them "going to go bankrupt" then it is a real possibility that Wild Oats will be able to get real and punitive damage awards from Whole Foods.  Mackey's blog posts and message posts were long enough and frequent enough that it was almost a part-time job for him.

Let's pretend that 'Rahodeb' never existed.  If Mackey would have just used his real name this would only be tallied as a 'strange method of promotion and ataacking competitors,' but in a world of full disclosure he stuck with an alias.  We probably wouldn't be calling for Mackey to step down entirely, but it doesn't take a rocket scientist to realize that an eclectic CEO that has had little to no supervision from the board of directors is the best guy to run the show when your company is under fire from the industry.  This might not be the case everywhere, but in major cities you no longer HAVE to go to Whole Foods if you are organic and health oriented.  Kroger (NYSE:KR) has started to really pick up its organics and 'whole food' initiatives, and will probably only continue.  Do you think the prices are just a tad better there or at other food stores for the exact same item?  Nope, not even close. Whole Foods is still going to make money and their stores will still be packed, particularly now that it actually has somewhat of a status symbol brand name.  Business Week has said this may have damaged the brand identity that the high-end depends upon.

Even before this last situation came up, the shares had slid nearly 50% from the highs over the last two-years.  That is because as the company grew, it became easier for competitors to sell the same exact products for less and they were able to spruce up their images simultaneously. Shares of Kroger have risen nearly 50% in the same period.  Whole Foods is still going to make money and that is not under question, but their margins could be at risk for the long-term.   Whole Foods no longer has a 40+ P/E ratio, but at this stage in their cycle it might not deserve more than a 50% premium to its pure-play grocery competitors.  We never expected any defection of "Whole Foods customers" to leave just because Wal-Mart has dipped its toe in the organic food pool, but what does that probably do to relative pricing power.  It's hard to say who would be an ideal CEO for the company in a more and more competitive environment, but after a certain point in a business cycle it is rarely the founder of the company.

24/7 Wall St. does not take calling for a CEO as a light matter.  We do not look at slight underperformance or just for a near-term stock pop as good enough reasons to call for a change.  But this company is now in a new stage of its cycle in an industry that has caught up to it. The company needs a 'less eclectic leader' and needs a board with a bit more power over its officers.   Even if Mackey somehow manages to hang on, the damage has been done and he has likely shot his credibility. At a bare minimum this is going to create new "anonymous public company officer posting guidelines" by the SEC, and this will become ethical case study material for universities and law schools around the country.

Mackey's issuance of statement claiming he had fun making these posts may even be used against him ahead.  This is also going to be a test over what defines "free speech" like someone yelling "fire" in a theater.  The truth is that Mackey did a great thing socially when he founded whole foods and really ramped up consumer awareness on the quality of food.  I still shop there and the Mackey gaff won't keep me from shopping there, even if I don't use them exclusively.  But that doesn't mean he is aligned with the best interest of shareholders if he tries to stay too much longer.  Sorry Mr. Mackey, but the company and shareholders will be far better if you step down (at least partially) sooner rather than later. 

There will be an earnings webcast on July 31, and if Mackey is going to step down (even if it is temporarily pending the investigation and review) it would seem logical that he does it before that date.  Also, here is the FTC hearing update site from Whole Foods that could get additional data.

Here was the original list of CEO's we issued throughout December 2006, and 5 of these 10 corporate leaders have left or have announced they'd be stepping down.  As a reminder, not all of these are calls to be fired as some are more strategic change recommendations.

Jon C. Ogg
July 18, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.