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Boards need to prepare for CEO succession

Board members, attorneys and human resource specialists need to work together to ensure companies are ready for CEO exits.

CEO succession planning has to be a top priority for boards of directors. Many directors may prefer not to think about it, especially if the company is moving along just fine. But emergencies can happen, and it is important to be prepared for them.

A company may need a new CEO quickly because of a variety of factors. The current chief executive may become ill, get fired quickly, or simply find another job.

Companies need to continually prepare for such a situation, and at any time be ready to name a new CEO.

General counsel and attorneys who work with boards of directors have key responsibilities in CEO succession. Legal rights of the company and the outgoing CEO need to be addressed, as do the rights of the new CEO and other candidates.

When it comes to some general guidelines, InterSearch Worldwide suggests the following:

  • Make CEO succession planning a continuous, collaborative and board-driven process.
  • Define clear roles in succession planning.
  • Identify internal CEO candidates well in advance of an event.
  • Benchmark internal and external candidates.
  • Be prepared to deal with the fact that some candidates could be relatives or family friends of the current leader, though that does not mean they should be among the finalists.

David Katz, an attorney with Wachtell, Lipton, Rosen & Katz who counts many boards of directors among his clients, has pointed out in a blog affiliated with Harvard Law School, that ideally the “succession process will be managed by a successful and trusted incumbent CEO, with the board or a board committee overseeing the process, reviewing the candidates and providing advice throughout.”

But the reality in planning for CEO successions is far from ideal. As many as 40 percent of new CEOs depart within 18 months of their appointment, Katz said, citing a study, while 64 percent of new CEOs leave within four years.

Last year, InterSearch Worldwide reported that a survey it sponsored showed 45 percent of executives from 34 countries said their companies have a process for conducting CEO succession planning.

"Forward-thinking, responsible companies have robust processes for CEO succession planning, so it may astonish some readers that fewer than half of the companies represented in our survey actually do,” Frank Schelstraete, InterSearch’s chairman, said in a statement. "Never let an emergency situation catch your company by surprise. Executives can resign or even pass away unexpectedly.”

The survey showed that of the largest companies, 73 percent had a CEO succession plan. On the other hand, 49 percent of medium-sized companies had a CEO succession plan. On the other hand, only 17 percent of smaller companies had a CEO succession plan in place.

It is also important to review and update a CEO succession plan, with lawyers obviously concerned that it meets with current legal requirements. The InterSearch survey showed that 73 percent of respondents say their companies review and/or update their CEO succession plan at least every three years, with 56 percent doing so once every year. But 27 percent update it or review it only as needed.

“We advise that there be a comprehensive discussion at least annually regarding internal candidates and planning for emergency circumstances,” Katz said. “One of the ways that a CEO can maintain the confidence of his or her board is by providing transparency as to the succession process on an ongoing basis.”

If the company is publically traded, a sudden CEO exit can negatively impact share prices, Gary Miles, director of international operations at Roffey Park, said in an interview with Forbes. And for all sized companies, corporate reputation can be impacted, as well.

“The key issue is a balance between identifying talent within your organization and getting people from outside,” Miles advises. “Successful organizations should be able to integrate internal succession plans with having good intelligence about external talent pools.”

In addition, Miles says a current CEO needs to be involved in the recruitment and selection for a successor. “They may not like it but they need to think about who their successor needs to be.  They need to be networking as an ambassador for the organization as they can be in touch with people who are future leaders,” Miles added.

Yet, Kim Lamoureux, vice president, leadership & succession research, Bersin by Deloitte, Deloitte Consulting, urged companies not to rely just on an advice from a current CEO.

That person “will often think about succession from their point of view and tend to base their successor on the current state of the market and business conditions.  They are not looking at what is required for that position based on business growth strategy. It shouldn’t be the CEO alone that selects their successor; they need to work with the Board of Directors and the HR function,” she said.

If a board lacks confidence in the incumbent CEO, or if there is crisis, the lead director should take charge of the succession process, Katz recommends. The board also needs to identify issues the company likely will face. “At that point, the board can then consider the appropriate traits, experiences and characteristics in a CEO candidate that would be most useful in meeting these challenges and guiding the company to future success,” Katz adds. “Directors must first establish a well-designed selection process, which may include the advice of counsel and other external consultants.”

All of this is important. In fact, InsideCounsel has reported that succession planning in the C-suite has been called the single most important decision facing boards of directors today. 

 

Further reading:

7 myths around CEO succession planning

Contributing Author

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Ed Silverstein

Ed Silverstein is a veteran writer and editor for magazines, websites and newspapers. A graduate of Harvard's Kennedy School of Government, he has won several...

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