Questions for boards and audit committees to consider
- Does the board discuss long-term and emergency succession planning regularly, regardless of CEO health and tenure?
- Does the board reassess the succession plan as the company’s long-term corporate strategy shifts?
- Does the board have a process for assessing and developing internal candidates at least two ranks down?
- Does the company’s executive compensation program include incentives tied to succession planning and leadership development?
The SEC deemed succession planning to be a risk management issue — a critical development for audit and risk committees.
When it comes to CEO succession planning, the stakes are high.
Inadequate planning can lead to prolonged and expensive executive searches, downward pressure on stock prices, loss of strategic momentum and investor confidence, and a successor who is out of step with the company’s strategy and culture.
Recent high-profile CEO transitions have highlighted these risks and prompted a renewed focus on succession planning at the board level.
The focus has continued to sharpen following action by the SEC, which, in 2009, recognized succession planning as an appropriate subject for shareholder proposals.
The SEC called it “one of the board’s key functions,” critical to ensuring that a company “is not adversely affected due to a vacancy in leadership.” The SEC deemed succession planning to be a risk management issue — a critical development for audit and risk committees1.
As it turns out, shareholder proposals seeking disclosure on the succession planning process have been largely successful. In particular, proponents have focused on high-profile companies, companies with long-tenured CEOs, those with family control or those with CEOs closely identified with company prospects.
Proposals that came to a vote in the past two years received relatively high levels of voting support2.
However, only 2 of 15 resolutions submitted in 2011 made it to a vote , 3 as shareholders and management found common ground through substantive dialogue focused on developing the leadership pipeline, integrating succession planning with the strategic plan and compensation program, and putting the board in the driver’s seat.
Planning for the future
Making long-term and emergency succession plans is a fundamental board responsibility, one that should be addressed on a regular basis, regardless of CEO health and tenure.
The board should drive the process with appropriate CEO input and disclose key features of the succession planning policy to shareholders (excluding candidate names or other sensitive data).
Ultimately, the process of succession planning helps develop talent, strengthen skills and reinforce strategic goals across the organization by:
- Identifying upcoming leaders and having the board interact with them to directly assess the talent
- Customizing leadership development goals linked to the long-term strategic plan
- Tying compensation to leadership development
Finally, boards should consider evaluating their succession planning practices not only to mitigate the risks associated with CEO transitions but also to capitalize on strategic and developmental opportunities.
3“Preparing for the 2012 Proxy Season” webcast, Georgeson, Inc. and Latham& Watkins LLP, available at http:// event.on24.com/eventRegistration/ EventLobbyServlet?target=lobby.jsp&even tid=343921&sessionid=1&key=03320A151006629BBE28E1590B7FB52B&eventuser id=55891811.
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