March 24, 2021

Blog: Succession is not just a great TV show

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Succession—it’s not just a great TV show. (And when does the new season start?) As this article in Corporate Board Member contends, selecting the next CEO “is often the single most important decision a board will make, yet between a quarter and a third of companies don’t have a succession plan in place—and even those who do often get it wrong.” Survey data in this post from Russell Reynolds Associates revealed that, even in the face of the pandemic, over 60% of responding directors “stated that their board had not reviewed or updated the succession plan for the CEO and other key executives in light of the health risks posed by the COVID-19 crisis.” Moreover, 70% of the largest companies (annual revenue of $10 billion and over) had not reviewed the CEO succession plan. The post reports that the need to replace a poor CEO selection has been estimated to lead “to a loss of $1.7 billion in shareholder value in addition to a loss of organizational confidence and momentum.” Not a good look. Why does this happen? According to an article from PwC, it’s often because “just having the conversation is difficult.”

PwC has outlined these seven best practices for boards in CEO succession planning:

Boards first need to reach a consensus on “skills, experience and personal traits” necessary for the next CEO to implement the company’s strategy. That process begins, PwC advises, by determining the factors that are expected to most affect the business over the next three to five years and “how the company’s strategy should reflect these changes.” With that information in hand, the board should hopefully be able to identify the qualities and experience necessary for the next CEO.
Although succession is clearly within the board’s remit, boards still need to establish clearly defined roles and responsibilities, whether it starts with an existing committee or a special committee or another structure, which must regularly update the whole board. The level of involvement of the CEO may vary, but the CEO’s point of contact is typically the board chair or lead director.
Another best practice identified by PwC is to have a written plan with goals and a timeline that identifies a timeframe for each step of the process. The board should also establish a process to update the plan (together with the chief human resources officer) at least annually. The plan should describe “the responsibilities and expectations of the new CEO. It could also include the skills and experience he or she will need to drive the company’s long-term strategy as well as a list of possible candidates.” The board should regularly discuss succession planning in executive session, and may also consider describing its succession-planning process in the company’s proxy statement for the benefit of shareholders.
Boards should also have a succession plan for emergencies in the event the CEO steps down suddenly. An emergency plan involves identification of candidates who can promptly step in, whether temporarily or long term. Candidates might include other executive officers, such as the CFO, previously identified CEO candidates or alternatively, board members who might fill the role until the board identifies a long-term replacement. PwC cautions that the process should be well documented in the board minutes.

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In this article from comp consultant Semler Brossy, the authors maintain that “emergency succession planning” should be high on boards’ agendas, especially in the context of a pandemic. An emergency where one or more key executives is suddenly not available “requires Boards and other executives to be prepared to marshal resources, act quickly, and communicate with authority to employees, customers, and shareholders in the face of uncertainty. Immediate actions are critical. Effective emergency succession planning frameworks should address a variety of circumstances and allow Boards to use their judgment in what will likely be an environment that is difficult to predict.”

To address these potential leadership challenges, the authors advocate that the board keep in mind key principles and test the company’s strategy with scenario-planning exercises. The authors advocate that three basic principles guide the board’s decision-making and communications. First, underlying all decisions is that any actions should be guided by the long-term best interests of the company. In that light, the board will need to assess which work and which roles are critical for business continuity. Second, the board will need to think through in advance the ramifications of change, keeping in mind that the assumption by executives of different roles can create “a chain reaction through the organization as responsibilities are redistributed. Thinking through these ramifications in advance helps ensure that critical gaps are managed and that corporate infrastructure can shift to accommodate new requirements. This may require thinking differently about roles and responsibilities among the team based on available skills.” Third, the board should prepare a plan to communicate to customers, employees and shareholders “from a position of strength,” allocating responsibilities for communications to help minimize confusion and disruption. The board will need to consider what information employees, customers and shareholders “need to hear right now,” who is best to convey that information and legal disclosure obligations. (See this PubCo post.)

Another leading board practice PwC advocates is discussion of succession planning with the CEO early and often. According to a PwC survey, 32% of directors responded that the biggest challenge in CEO succession planning is that the current CEO is performing as expected. Approaching the subject from the get-go and regularly thereafter is one way to remove the awkwardness and reduce the risk that the CEO takes the issue personally or feels threatened by the process. The CEO also has a role to play in succession planning: identifying and grooming potential successors. Boards should regularly make inquiry on whether internal candidates “are getting the proper experience and exposure to assume the position.” According to the NACD, almost 39% of companies consider the CEO’s development of direct reports as a nonfinancial metric used by boards to determine CEO pay, second only to the metric of employee engagement.

Again citing an NACD survey, PwC indicates that the biggest challenge in CEO succession planning is identifying a pipeline of good candidates. Companies can help develop internal candidates through formal programs that provide exposure to many parts of the business and experience in CEO functions, such as reporting to the board, which also enables the board to evaluate the candidates. PwC suggests that candidates also be given responsibility for key initiatives. Quietly identifying external candidates (without contacting them) allows the board to benchmark internal candidates. The board should keep in mind that, in the event of an actual CEO vacancy, competition among candidates can create tensions that the board may be able to dissipate to some extent by treating all candidates as if they could be selected for the position. Another potential fallout is that the candidates who were in contention for the CEO position but not selected may leave the company. PwC advises that the board should “be aware of this risk and do scenario planning. Which candidates do they want to stay after the decision? Depending on the answers, directors can help mitigate the problem by finding new roles or expansion opportunities for the executives they are interested in keeping. They will also need to think about who might replace those that leave after they make the new CEO appointment.”

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According to an article in the Washington Post, a 2014 study showed that one problem with selecting and grooming potential internal candidates is that board members don’t know that many members of the management team: when asked how well they know senior executives a rung or two below the CEO, the answer was “not very well.” The article reports that “[o]nly seven percent of companies assigned a board member to mentor senior executives below the CEO. Just 23 percent of the directors surveyed said they participated in the performance evaluations of these top managers. And the vast majority (71 percent) said they visit company offices or work locations without the CEO present only “when circumstances warrant,” rather than on a regular schedule. But these results can’t be attributed just to lack of time or logistics. There may be more tender factors at play: “what’s also a factor is the delicate egos and individual personalities that must be navigated when talking about who will follow a CEO.” According to one commentator, “[i]n succession planning, the CEO you’re looking to replace many times is sitting right there….It becomes very personal. They think, ‘Why aren’t you looking for someone just like me but younger?’”

Ensure that there is a transition plan in place for the new CEO that provides good onboarding—helping the new CEO learn about “company goals, strategy and company culture”—as well as board time, attention and guidance. To help ensure a successful CEO launch, the board should signal to all stakeholders its support of the new CEO.

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Directors participating in Corporate Board Member’s annual Boardroom Summit offered the following advice:

• Regardless of how long the current CEO has held office, the board should make succession planning a top and continuing priority. Moreover, that priority should start with the management team but should also be “part of the culture of the organization at every level.”

• The selection process should take into account the company’s “strategic and cultural priorities,” including factors such as “why the enterprise is successful today, where are its weaknesses, how is the market changing?”

• Boards should include objective and predictive data in their assessments of candidates, including outside evaluations, in considering leadership abilities. Objective data also “mitigates the risk of favoritism and bias when evaluating candidates.”

• Candidates should be assessed from a variety of perspectives. The skillset that made a candidate successful in sales or operations doesn’t “always translate to a CEO role.” The article suggests that the board should have multiple opportunities to engage directly with potential successors and assess how they handle various situations.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Attorney Advertising.