Regulatory: Now is the right time to adopt an emergency succession plan

Planning ahead ensures that decisions about successor appointments are made in advance of unplanned occurrences

The board of directors plays a key role in establishing and overseeing the management succession planning process. It continuously evaluates executive talent within the organization and searches for talent outside the organization when necessary. Institutional investors and activist shareholders have continued to focus considerable attention on the board’s proper role in the management succession process, and as a result, public companies have increasingly established great rigor around their management succession plans. The key objective of any management succession planning efforts is to create a process that seeks to ensure continuity of management over the long term, while promoting smooth transitions when changes in management become necessary.

The need for an emergency succession plan

An element of succession planning that is sometimes overlooked is the need for a defined policy concerning emergency management succession. In recent years, the increased focus on health issues afflicting well-known executive officers of public companies, as well as high-profile resignations or terminations of executive officers due to conduct issues, has heightened the awareness of boards as to the need for emergency succession plans. The purpose of an emergency succession plan is to ensure that decisions about successor appointments are made well in advance of unplanned occurrences, such as the illness, death, resignation or termination of the CEO or other critical executive officers. The pre-ordained lines of succession set forth in an emergency succession plan can serve to avoid temporary (or even long-term) senior management vacancies that could negatively impact ongoing operations and undermine the confidence of investors.

Elements of an effective emergency succession plan

Today, the terms of emergency succession plans vary considerably across public companies. Some companies may only plan for succession of the CEO, and others seek to address emergency succession for all or a significant number of the executive officers. 

It is advisable that boards implement emergency succession plans in conjunction with their companies’ overall processes for managing executive succession. A committee of the board of directors typically oversees the emergency succession plan, usually the committee that is vested with oversight of the overall succession process, such as the compensation committee or nominating and corporate governance committee. The full board of directors is ultimately responsible for the appointment of any executive officers, including interim appointments under the emergency succession plan.

An emergency succession plan today should contemplate not only succession in the event of unexpected occurrences such as death, disability and resignation or removal under unexpected circumstances (e.g., in the event of gross misconduct, indictment or taking a position with another company), but also succession in the event of temporary, unplanned absences. The temporary, unplanned absence provision of the plan should address the interim appointment of a CEO or other executive officer when an individual expects to be out of the office on an extended but temporary basis, such as due to a treatable illness. It is typical that such absences be limited to those expected to last a specified period of time, which the committee establishing and overseeing the plan should determine.

Given the types of circumstances in which the emergency succession plan is to be implemented, it is recommended that the interim appointments by the board of directors occur within a specified period of time after the committee receives notice of the unexpected occurrence. The length of the period may depend on a company’s circumstances, however, a two-day period may often be the most appropriate period when the emergency succession plan identifies the specific individuals and their lines of succession.

When establishing the process for making interim appointments, the emergency succession plan should also preserve the flexibility for the board of directors to make permanent appointments, in the possible event that the established lines of succession are consistent with the board’s and the CEO’s plans for long-term succession.

It is often advisable that two or three executive officers be designated as successors for a particular position, in order to address the potential that more than one executive officer could be subject to the unexpected occurrence at one time. This number should be adjusted to reflect the company’s own judgments as to the depth necessary for succession of each specified position.

The emergency succession plan should establish that the board of directors, in consultation with the designated committee, is vested with authority to set the terms of any interim appointment under the plan, the scope of authority of the interim appointee and the compensation for the interim appointee. With regard to the scope of the interim appointee’s authority, the committee may want to consider whether the interim appointee’s authority should be limited so that he does not change the company’s strategy or initiatives, unilaterally change financial policies or make significant management changes during the term of an interim appointment.

It is recommended that the emergency succession plan remain confidential, with access limited to the board of directors and a limited group of employees who have a need to know about the existence of the emergency succession plan. There is no requirement to publicly disclose the existence of an emergency succession plan or the contents of an emergency succession plan. A company should consider, however, whether it should provide some broad disclosure of its attention to emergency succession planning in its proxy statement and/or its corporate governance guidelines, given the particular attention to this issue among institutional investors.

It is suggested that boards review the emergency succession plan annually and at any time there is a change in management structure or in the individuals serving in management positions that impact the identified lines of succession.

Contributing Author

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David Lynn

David M. Lynn is a co-chair of Morrison & Foerster LLP's Public Companies and Securities Practice. Mr. Lynn's practice is focused on advising a wide...

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