Succession Planning in a Time of Crisis

Richard Alsop, John J. Cannon III, and Doreen E. Lilienfeld are partners at Shearman & Sterling LLP. This post is based on a Shearman & Sterling memorandum by Mr. Alsop, Mr. Cannon, Ms. Lilienfeld, Gillian Emmett Moldowan, Lona Nallengara, and Linda Rappaport

Planning for an unexpected absence or loss of a key person is an important component of enterprise risk management. In the present environment, boards are meeting regularly in real time to address absences of key persons–both temporary and sustained–to ensure that their existing succession plans are withstanding the current test. Another added challenge for some companies has been the need to address multiple absences occurring at the same time. This post briefly discusses best practices and key considerations for companies and their boards as they confront these possibilities in light of the COVID-19 pandemic.

Identifying an Immediate Successor or Interim Replacement

An unexpected absence or loss of a key person can adversely impact a company’s ongoing operations, stock price, employee morale and overall short-term stability. Therefore, effective risk management requires identifying the individuals within the organization who have the skills and experience to immediately and effectively fill any gaps. Potential successors must also be perceived by the market as having the necessary experience to fill the role.

If a company has an announced or obvious successor who is capable of immediately providing the requisite guidance and stability to the company, then the emergency successor or interim replacement determination could be straightforward. There is always risk, however, when elevating an executive to a role earlier than anticipated. Putting a promising talent in a role too early and in a time of crisis may create a very challenging experience that could result in a loss of a promising leader in the organization. Where there is no “ready now” successor, we would recommend placing a more seasoned interim successor in the role who can more immediately guide the company in a time of crisis and provide short-term stability, even if there is no expectation that such person will continue in that role on a long-term basis. Often, a board member will serve as an interim successor to a chief executive officer or chief financial officer, especially in cases where the board member may be a retired senior executive of the subject company or of another company in a similar industry or having comparable levels of complexity and size. Ideally, the interim executive can also serve as a mentor to the eventual long-term successor.

In circumstances where there is a loss or absence of a director, the level of urgency with which the board must act will depend on board size, as well as the absent director’s expertise and role on the board. In situations where the impacted director’s expertise is crucial to the company’s operations, where he or she is a committee chair or serves as a “financial expert,” the board should quickly assess the gaps in skills and experience that have been created by the director’s absence and identify current board members who might be able to step into those roles in the short term. There is even more urgency to that analysis if the unexpected loss of a director causes the board or its committees to have an insufficient roster of independent directors who satisfy applicable exchange requirements, although the exchanges do permit cure periods in such cases. Longer term, the nominating and governance committee should target those skills in subsequent director nominee searches, along with broader criteria, when looking for new board members.

Implementing an Existing Succession Plan

Where a company has an existing emergency succession plan, its proper implementation should ensure a seamless transition. A well-developed emergency succession plan is one that takes an “evergreen” approach to succession planning, so that succession planning is a regular board or management team agenda item, which in turn puts a company and its board in a better position to withstand a crisis and to move swiftly to maintain short-term stability and business continuity. A robust “evergreen” approach not only assists in identifying and grooming one or multiple potential successors for each key role, but ideally also identifies the successor’s successor. In some cases, the same person may be named as a potential replacement for multiple roles. Boards are also currently focused on how some roles can be shared in the event that there are multiple illnesses at the same time and a shortage of internal talent with particular skills.

Succession planning (and implementation) for key executive and director roles is typically led by the entire board or a board committee. For key personnel below the executive management team, good managers ought to generate and regularly refresh their own team’s succession plan for review and sign-off from senior management and should be judged and compensated for developing strong teams and multiple succession candidates who could serve on an emergency and long-term basis.

For those companies that have not developed a robust succession plan dealing with both emergency and regular succession matters, we recommend adding this planning to the board’s agenda promptly, especially in light of the current crisis. This will allow companies and their boards to be proactive in preparing for an unexpected loss or absence of a key person. Principal agenda items for succession planning teams to consider include: potential triggering events; identifying positions critical to the company and multiple succession candidates for each critical role, including interim and possible permanent candidates; tracking potential external candidates; employee communications; and potential public disclosure requirements.

Public Disclosure

Generally speaking, there is no affirmative requirement to disclose an executive officer’s or director’s illness or other serious health issue. However, if the health of a company’s CEO, CFO or other key officer is significantly impacted such that it involves a reassignment of his or her duties, a company should make current disclosure. Form 8-K disclosure is triggered when an executive officer’s responsibilities are materially reduced, even if he or she is not technically terminated from a position. In addition, if an individual is elevated to a role that is performing the function of the departed or absent executive officer, that appointment must also be disclosed on Form 8-K. And, of course, the death or resignation of an executive officer or director would also necessitate current disclosure on Form 8-K.

Companies must also balance disclosure obligations and preferences with the executive officer’s or director’s personal privacy concerns. As noted above, other than in situations in which an executive officer or a director can no longer perform his or her duties, there are generally no affirmative disclosure requirements when an executive officer or director becomes ill. There may, however, be situations where a company has a strong incentive to disclose an executive officer’s or director’s illness, such as to prevent potential leaks or rumors, and to allow the company to present its contingency plans in a direct manner to investors. For example, an executive who is regularly in the public eye or consistently engages with employees who is suddenly absent for some period of time may raise concerns from investors and the company’s workforce. As a consequence, the company may want to consider disclosing the absence to mitigate investor and employee speculation and control the flow of information. Note also that, in the absence of disclosure, knowledge of a key person’s illness may constitute material non-public information requiring a blackout in securities trading activities.

Disclosure related to executive officer and director health issues is one of the most challenging and sensitive disclosure topics to manage. The executive officer or director should be involved, as much as possible, in the discussions and planning to ensure that he or she is comfortable with the disclosure.

Our Take

Identifying emergency successors or interim replacements and implementing a well-developed emergency succession plan is critical for companies to effectively mitigate potential significant risks related to unanticipated absences and departures of key executives and directors. The current crisis has underscored the need for business continuity planning that is latticed and multi-levelled. Companies should reexamine their current processes now to ensure that they can withstand current conditions.

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