CEO SUCCESSION: THE ULTIMATE MEASURE OF BOARD PERFORMANCE
by Clarke Murphy, The Corporate Board - July/August 2010
Item number one on any description of corporate board duties is hiring and firing of a chief executive. However, success in CEO selection depends in large part on shaping a sound succession process from the board level. Shareholder advocates now see good CEO succession planning as a reflection of the quality of the board itself. Public debate regarding corporate governance issues tends to focus on one primary topic at a time, depending on the dictates of current events. Classified boards, “overboarding,” director compensation, risk management—the attention of the corporate governance community has been focused on each of these matters in turn during the last dozen years. Progressive boards use these attention cycles to periodically reexamine their key responsibilities in light of evolving best practices. A topic currently moving to the fore is the role of the board in CEO succession. The economic turmoil of 2008 and 2009 resulted in several unplanned CEO departures, which served as a very public test of those boards’ CEO succession plans. Some boards passed and some did not. However, all boards were served notice that CEO succession planning must evolve beyond an unread binder in the corporate secretary’s office. This focus of attention became official last October, when the Securities and Exchange Commission issued guidance that companies should no longer expect to be allowed to exclude shareholder proposals regarding CEO succession planning because they dealt with “ordinary business operations.” Reversing a long-held earlier position, the SEC recognized CEO succession planning as a “significant policy issue regarding the governance of the corporation.” As such, it was an appropriate matter for shareholder concern. It is worth noting that SEC reversals regarding acceptable shareholder proposal topics often signal that an issue has achieved a critical level of public attention. The first shareholder proposal regarding CEO succession planning to reach a vote took place at the Whole Foods Market annual meeting in March 2010. The proposal, which called for the company to adopt and disclose a written and detailed succession planning policy that included the establishment of CEO job criteria and the development of internal candidates, was defeated. However, it garnered nearly 30 percent of the vote despite unanimous opposition from the board. While it remains to be seen if any similar proposals will succeed this year (the first year such proposals were successfully introduced), boards need to accept that they will be part of shareholder agendas for the foreseeable future. HOW A BOARD HANDLES SUCCESSION PLANNING IS INCREASINGLY VIEWED AS A PROXY FOR THE COMPETENCY AND LEVEL OF CARE IT BRINGS TO ITS GOVERNANCE RESPONSIBILITIES. Shareholders are not the only constituency focused on CEO succession. Ratings agencies (and thus creditors) are incorporating it into their company reviews. They recognize the risk to continuity of operations posed by a poorly handled transition. Shareholders and investors are also concerned that a company caught flat-footed by an unplanned CEO departure is less likely to make the best possible choice of successor. Instead, the company could end up with a cultural mismatch in the CEO they choose, given the time pressure to fill the top slot. Beyond these specific concerns, how a board handles succession planning is increasingly viewed as a proxy for the competency and level of care it brings to its governance responsibilities. According to a recent survey of public company directors by the National Association of Corporate Directors, 43 percent of companies have no formal, written succession plan. Only 16 percent of directors considered themselves to be “highly effective” in succession planning. Clearly, there is a great deal of work to be done. CEO SUCCESSION LACKS URGENCY COMPARED WITH...
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