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CEO Succession Planning – Elephant in the Board Room

January 29, 2014 Board of Directors, Corporate Governance, Featured
SCGG Feature

Few things are more important to a company’s success than identifying, hiring and retaining an effective CEO. Conversely, few things are more debilitating than a prolonged period before or after a CEO’s departure. Even worse, there are plenty of headline-grabbing examples of companies hiring a CEO only to quickly reverse course and go through the whole process again a year later: Leo Apotheker—Hewlett-Packard; Al Dunlap—Sunbeam; Jack Griffin—Time, Inc.’s magazine division; Fritz Henderson—General Motors; Ron Johnson—J.C. Penney; and Vivian Schiller—NPR, to name a few.

It is widely known that finding the right successor is a time-consuming, arduous process involving a lot of analysis and input from a lot of different people. Yet no one really wants to plan for CEO succession.

Is CEO succession planning really so important?

It is axiomatic that an effective CEO is crucial to long-term success. What is less obvious is that planning ahead for a new CEO is essential to obtaining an effective CEO within a reasonable timeframe.

It is important to remember that the average CEO’s tenure is a relatively brief six years according to Crist Kolder Associates, The Volatility Report 2012 (about the same as a professional football player). Furthermore, well over half of new CEOs leave within four years of their appointment (see Pick a CEO Who Truly Fits the Company). So it does no good to pretend that your current CEO will be around forever, no matter how well things seem to be going right now. Changing circumstances, whether from the CEO’s perspective (personal changes or career opportunities) or the company’s perspective (strategic or philosophical shifts), must be anticipated.

Cranking up a CEO search from scratch after a departure is announced or actually occurs is the least effective way to handle the transition for many reasons:

  • Creating and agreeing on an “ideal” candidate profile or job description is a time consuming and difficult undertaking.
  • A broad, comprehensive CEO search takes a long, long time. It typically includes engaging a search firm and educating the search firm about the company’s culture and expectations.
  • As the process drags out, negotiating leverage shifts toward the CEO candidates, who are very aware that the company’s clock is ticking and the market is watching.
  • The stress of being without a CEO increases exponentially as the months pass, which can result in a bad hiring decision as the board tires of the process and feels pressure to fill the position and move forward.
  • At some point, as time passes, it will become obvious to your shareholders and analysts that the company did not have a viable succession plan, which calls into question the quality of its overall governance and the effectiveness of its board.
  • The company could at some point be perceived as weakened and, therefore, more susceptible to shareholder activism, takeover approaches, aggressive competitive maneuvers, customer or supplier concerns and the like.
  • Assuming that a good CEO actually provides leadership, vision and strategic value, the longer you are without one, the more the company will suffer.

Most directors already recognize that CEO succession planning is one of the most important things that they do. Certainly, every company’s Corporate Governance Guidelines and the Nominating and Corporate Governance Committee charter cite executive hiring, supervision and succession planning as key responsibilities. Yet ironically, CEO succession is frequently cited by directors as something that needs improvement. For example, a 2011 PricewaterhouseCoopers survey indicated that 59% of directors thought that more time should be spent on succession planning.

So why is meaningful succession planning so hard to do?

In spite of everything that’s been said, the replacement of the CEO is a highly sensitive, personal matter. Basically, you are asking the current CEO and the directors who work closely with him or her to engage in direct, substantive dialogue about his or her ultimate demise (one way or the other). Much like estate planning, it is a topic no one is comfortable raising or talking about more than superficially. Doing so involves discussing the current CEO’s personal plans (career progression and retirement, for example), the characteristics of the perfect replacement (which may not match those of the current CEO) and identification of possible replacements (creating potential tensions and jealousies).

So for many companies, CEO succession planning is the elephant in the room. Everyone knows it’s there, and it’s given a passing reference because the General Counsel says that the board must, but the result is frequently superficial.

What are the keys to effective succession planning?

Here are some suggestions for moving your CEO succession planning from perfunctory to meaningful:

  • Educate the board of directors on its importance and the ways in which the current plan can be improved. This can be initiated through a one-on-one conversation with the chairman (if he or she is not also the CEO) or the lead independent director (LID). The next step might be a discussion with all independent directors in executive session.
  • A director should be appointed (the LID unless someone else has a particularly close relationship with the CEO) to discuss the board’s intention to invigorate succession planning and the reasons behind it.
  • The CEO should be asked to share his or her career progression or retirement plans and any other information that might impact CEO succession going forward.
  • The CEO should take a leadership role in the process, just as he or she does with non-CEO succession planning.
  • Any plan should be two-pronged to address both emergency succession and natural succession.
  • Develop a detailed candidate profile that addresses background, education, experience, fit and any other factors that the board deems important to facilitate the company’s long-term goals.
  • Consider engaging a recognized search firm now. This will give you time to bring them up to speed and let them begin to assemble a pool of outside candidates.
  • Review and compile a list of potential internal candidates. Even if there appears to be no logical internal successor, keep in mind that some individuals may develop over time into viable candidates. In addition, such persons can capably serve on an interim basis in the case of an emergency succession.
  • Appoint a search committee, which can also function as a CEO transition committee when that day comes.
  • Update the candidate profile and external and internal candidate pool regularly (annually is recommended) to keep up with changes in the company.

As with most governance matters, the key to success is to treat CEO succession as a serious process that is instrumental to the long-term success of the firm, rather than a perfunctory formality. Doing so will pay significant dividends in the long run.

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