”Finding two CEOs who are exceptionally good and share the burden of decision making on a 50-50 basis in all areas is almost impossible,“ one expert says
Netflix has long touted the benefits of its co-CEO model, which saw Reed Hastings and Ted Sarandos working side by side under the title from July 2020 until last month.
But now that Hastings has stepped back from his co-CEO duties and handed over the reins to Ted Sarandos and Greg Peters, newly elevated from the chief operating officer role, the question remains: Are two CEOs truly better than one?
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Between Sarandos’ appointment as co-CEO on July 16, 2020, and Peters’ appointment on Jan. 19, 2023, Netflix’s stock price has fallen 40% — largely due to the COVID-19 streaming boom ending, two consecutive quarters of Netflix subscriber declines in April and July, and overall weakness in tech stocks. Despite these tough odds, the streaming behemoth grew to 230.75 million total subscribers globally and produced $1.6 billion of free cash flow at the end of 2022.
The co-CEO model works particularly well for Netflix because the two leaders run two distinct operations that require very different skill sets, Loyola Marymount University associate professor of finance David Offenberg told TheWrap.
“One side of the business is making and buying the shows that go on the platform, like a traditional Hollywood studio,” he said. “The other side is building and improving the technology that runs the platform and allows them to venture into new revenue streams, like ads and gaming. Netflix needs both sides to be best-in-class to stay competitive, so it makes sense to hire two specialized executives to run them.”
Offenberg notes that one of the major benefits of a co-CEO model is that it can keep executive egos in check.
“By having co-CEOs, the firm eliminates the possibility of one CEO surrounding themselves with a bunch of people who always agree,” he said. “There will be debate, which will help the company move forward on key decisions in well-informed ways.”
But Wedbush Securities analyst Michael Pachter believes Hastings’ move is simply an “ego play” and that he isn’t really taking a back seat. He sees the arrangement as more of a troika.
“As far as I can discern, the only difference is going to be Reed won’t be on earnings calls anymore. So he got away from that, but he’s still going to make all the decisions,” Pachter said. “This division of responsibility between Ted and Greg Peters is intended to just make sure that Reed completely hobbles their ability to make any decisions and that they still have to go to him. So I see it as an absolute governance cop-out.”
A Netflix spokesperson pointed to a January statement by Hastings in which he said he had “increasingly delegated the management of Netflix” to Sarandos and Peters over the past two and a half years.
Netflix has presented its decision as data-driven, though quantitative research around the topic is limited. The company pointed TheWrap to a Harvard Business Review study of 87 public companies with co-CEOs conducted in July 2022.
The analysis found that firms with co-CEOs tended to produce more value for shareholders than their peers: On average, the companies generated a shareholder return of 9.5% — significantly better than the average of 6.9% for each company’s relevant market index, according to the study. Nearly 60% of the companies led by co-CEOs were found to outperform and the average tenure of a co-CEO was about five years.
In addition to Netflix, the co-CEO model has been adopted outside of Hollywood at public companies including electronics giant Samsung, home construction firm Lennar, cloud provider Workday, shoemaker Allbirds and private equity firm KKR, among others.
Brett Goldberg and Chris O’Brien, the co-CEOs of online ticketing marketplace TickPick, have praised their dual chief executive structure. Goldberg oversees all of TickPick’s business operations, while O’Brien runs the technical and product side, a division broadly similar to Netflix’s.
“Our co-CEO model is a boon to the company’s efficiency and ability to grow. We’ve been able to disrupt secondary ticket marketplaces with our no-fees model and introduced industry-leading technology to our platform because of the leadership that exists across business units,” Goldberg told TheWrap. “A single chief executive has less time to allocate to growth initiatives whereas the co-CEO model doubles that time.”
He adds that the co-CEO dynamic has offered a “checks-and-balances system that’s absent with a single chief executive” and ultimately made him and O’Brien more effective decision makers.
O’Brien told TheWrap that it’s been “super valuable knowing there’s always another brain to pick” and emphasizes that trust is critical to an effective co-CEO model.
“You need a co-CEO you can constantly rely on,” he said. “Constantly communicating and ensuring your goals are aligned is key. You need to effectively understand what tasks to delegate and be able to organically act as joint managers for the model to be successful.”
Despite Netflix and TickPick finding success in co-CEOs, companies like Chipotle, Oracle and Salesforce have done away with their dual-leader structure, though the reasons for doing so varied significantly.
When Chipotle’s co-CEO Monty Moranhas stepped down from his position in 2016, the fast casual restaurant chain’s lead board director Neil Flanzraich said the approach proved to be “a very successful formula” but that “operations became more complicated and less consistent” as the company grew.
In September 2019, Oracle said that co-CEO Mark Hurd requested a leave of absence due to health reasons. A month later, the software provider reported Hurd’s death and confirmed that his counterpart, Safra Catz, would become sole CEO. When asked by analysts about plans to continue the co-CEO model during its Q2 2020 earnings call, co-founder Larry Ellison said the company had “no plans for having a second CEO.”
“It was an unusual situation, where Mark and Safra were an absolutely fantastic team, but we have complete confidence in our existing management team,” Ellison added.
Most recently, Salesforce co-CEO Bret Taylor formally exited his role Tuesday. The Wall Street Journal reported that tensions grew between Taylor and co-CEO Marc Benioff prior to the official announcement in November of Taylor’s planned departure. Sources familiar with the matter told the Journal that Benioff was concerned that Taylor was spending too much time as Twitter’s chairman, with other CEOs and customers and not enough on Salesforce’s product and engineering.
“Finding two CEOs who are exceptionally good and share the burden of decision making on a 50-50 basis in all areas is almost impossible,” Stefano Bonini, an associate professor of finance at Stevens Institute of Technology, told TheWrap. “Sooner or later, [the co-CEO model] may lead to some bad decisions because people start being complacent with each other, because either you don’t want to get into a fight or fight because the views diverge and then no decision is taken.”
While Goldberg acknowledged that companies can “stagnate” when communication between co-CEOs breaks down, he emphasized that each company’s decision regarding corporate governance is individualized and argued it’s not indicative of the co-CEO model’s lack of long-term sustainability.
“As long as investors continue to support the model — angel investors, venture capitalists and retail investors — it’s sustainable in perpetuity,” he added.
In the specific case of Netflix, Hastings, Sarandos and Peters have worked together for many years and “successfully melded a management culture where they can work together,” CFRA Research analyst Kenneth Leon told TheWrap.
“Co-CEOs is always a challenging model. It’s one where it’s unusual to see this work for many years and I think in each case you have to look at the players and they play a key part in whether it can be successful or not,” he said. “And I think Wall Street thinks Netflix will be successful.”
Bonini points out that the setup of Hastings as executive chairman and Sarandos and Peters as co-CEOs provides a “pretty safe environment to experiment with something that has a certain degree of risk.”
“If it doesn’t work out as expected, there is a backup plan in some sense [with Hastings staying on as executive chairman] that should reassure investors and shareholders,” he said.
Lucas Manfredi is a TV Business reporter with TheWrap. He has a Bachelor of Science in Television-Radio from Ithaca College. He can be reached at email@example.com.