What to Do When the CEO Goes Bonkers

The odds are good that you’ve never met either Jonathan Seiffer or Jonathan Sokoloff.

They’re worth knowing, or at least being aware of.

These men may be the only people that can save a $4 billion company. Both have serious Wall Street resumes and deep experience with some of the nation’s leading retailers. The two men are on the letterhead at Leonard Green & Partners, a boutique investment shop whose founder was a leader in leveraged buyouts.

They also sit on the board of Whole Foods (NYSE: WFMI).

Leonard Green made a $400 million investment in Whole Foods last year. Seiffer and Sokoloff came on the board to keep an eye on things. I don’t know what has gone on inside of the company’s downtown Austin headquarters, but I do know what the shares have done on the floor of the New York Stock Exchange. They’ve gone from about seven bucks to within inches of $30. They are up +212.7% year-to-date.

The trouble? Founder John Mackey has lost touch.

A CEO out of focus is a huge liability, one that that threatens to destroy shareholder value. Seiffer and Sokolov need to lead a boardroom coup. They must either kick Mackey out or change his title to “chairman emeritus” and put a hot shot in charge of the day-to-day.

#-ad_banner-#Mackey has always been countercultural. To be fair, that hasn’t always been a bad thing. He pioneered organic foods and helped give birth to a movement. His grocery stores took the “organic lifestyle” from the fringes to the mainstream. Whole Foods customers used to be a bunch of long-hair yahoo granolas who drove VW buses. Now the stores cater to foodies and soccer moms. The VWs are gone. The parking lot now looks like a Lexus dealership.

So from these beginnings, Mackey wasn’t going to be a typical CEO. A strange story emerged about the CEO’s “undercover” postings on stock message boards — a series of rants that lasted eight years. And while many executives would have been canned for such ill-advised antics, Mackey — the company’s founder — not only got to stay on but kept the top job. Mackey continued to spread the organic gospel. He kept building Whole Foods. He even made a serious acquisition, buying out rival Wild Oats.

All hell broke loose. Federal antitrust regulators worried that Whole Foods might have gone too far with its acquisition. Then the economy faltered, and shoppers traded down as unemployment and uncertainty rose. The stock price plummeted. It looked bad for the company. Mackey personally felt the financial squeeze and said he and his family had to adjust.

Enter Leonard Green & Partners. They wrote Whole Foods a check for $400 million that allowed the company to continue its expansion without much regard to the underlying economy — a cagey way to position the company as the hands-down strongest competitor when the economy turned around. The feds dropped whatever objections they had to the merger. Wall Street cheered: The company now trades at an astonishing 45 times earnings, more than twice the valuation of the S&P 500 Index.

In the past month or so, Mackey has stepped off the reservation twice.

First, he told an interviewer that the company sells too much unhealthy food and that it would stop doing so. Then he penned an op-ed for the Wall Street Journal to suggest how the nation should reform health care. The piece drew protesters at Whole Foods’ Austin headquarters.

I concede that Mackey did a good job keeping his eye on the most important tasks at hand during the downturn. I predicted he would — as I knew Leonard Green would be looking over his shoulder. I recommended the shares at their low, when people were saying customers wouldn’t return to Whole Paycheck after the economy improved.

I recently suggested that the shares had exhausted their upside, a position I stand by still. And I took a pot shot at Mackey after his healthy-foods rant. Now I think the time has come for the board to “retire” Mackey. Kick him upstairs and let him write editorials and opine about healthy eating all he wants. Make him a goodwill ambassador.

But it’s clearly time to bring in a new CEO who’s ready to take the company to the next level. Bring in a retail wizard who will give customers more of what they want, not tell them what they need. You can bet Seiffer and Sokolov have some names in mind. They should make a few calls.

All boards are obligated to protect shareholders’ interests. Mackey doesn’t appear to be doing that — he’s too wrapped up in his own interests.

The countercultural CEO had his time in the sun. He built a company that now has millions of loyal customers. But his focus is clearly elsewhere. He doesn’t want to run the nation’s premier gourmet grocery store. In fact, he’ll take issue with that description of Whole Foods.

That’s the point: Mackey doesn’t want to focus on foodies — that offends him. He wants to focus on natural, healthy food. He wants to scold, not to sell. Well, shareholders want the company to make money, and customers want to buy stuff that tastes good. They want to go to Whole Foods and see chefs demonstrating gourmet food, not to have Beardo the Weirdo hand them a leaflet about the virtues of free-range chicken.

As I wrote earlier, when loyal customers come into a store willing to spend more, even in a downturn, then the money shot is to give them more of what they want, not less. Even if it does have sugar or fat in it.

WFMI shares don’t have any upside unless or until Mackey goes.