The Board’s Role in Succession Planning

One of the most challenging aspects of the recent financial crisis has been the significant increase in the number of CEOs who have left their companies unexpectedly or on short notice. Despite this trend and the widespread view that succession planning is a critical board function, directors of many public companies are not fully satisfied with the effectiveness of their succession planning.

Against this background, the Lead Director Network, a group of lead directors, presiding directors and non-executive chairmen from many of America’s leading companies, met recently to discuss the board’s role in succession planning. Following this meeting, King & Spalding and Tapestry Networks have published the ViewPoints report here to present highlights of the discussion that occurred at the meeting and to stimulate further consideration of this subject.

The following provides highlights from the meeting, as described in the ViewPoints report:

• Emergency CEO Succession Plan: Members of the Lead Director Network believe it is critical to draft an emergency CEO succession plan and to review that plan annually. The members point out, however, that the specificity of these plans varies. Some companies have a very detailed step-by-step plan, while other companies have a less formal plan.
• Components of an Effective Long-Term CEO Succession Planning Process: Members identified the following as core elements of an effective long-term succession planning process: (1) clear roles and responsibilities of the board and the CEO, (2) a timeline for CEO succession, (3) an assessment of the company’s future business needs, (4) consensus on the attributes and experiences of the next CEO, (5) the board’s familiarity with potential CEO candidates, (6) an open dialogue between the board and the CEO, and (7) clear understanding of the transition role of the outgoing CEO (e.g., serving as Board chairman for a period of time).
• Role of the Board, the Lead Director and the CEO in CEO Succession Planning Process: There was no consensus among LDN members as to whether the full board or a board committee should lead the CEO succession planning process; the board is more likely to rely on a committee in an emergency situation. Lead directors often are responsible for a variety of critical tasks in the CEO succession planning process, including interviewing potential CEO candidates, collecting feedback from a variety of sources, aggregating performance evaluations and having conversations with the CEO regarding his or her perspectives. Beyond these tasks, the lead director often plays a critical role in brining the board to consensus. With respect to the role of the CEO in the succession planning process, members believe that since the CEO contributes to the internal candidates’ annual performance reviews, the CEO can support the succession planning process by communicating to the board the strengths and weaknesses associated with the internal candidates, including their leadership abilities.
• Role of search firms and consultants: LDN members believe that outside firms can contribute to succession planning by benchmarking internal candidates and using external benchmarks to assess internal candidates. Members cautioned, however, that outside firms may have a vested interest in promoting external candidates and that it may be difficult for the board to support good internal candidates, once external candidates are introduced. Members believe that a company with strong succession planning should be able to develop the best candidates through internal processes.
• Oversight of Management Succession Process: In addition to being responsible for CEO succession, boards should provide oversight and support for the wider management succession process. Network members report that boards often develop relationships with as many as the top 20 or so senior executives over a period of years. Looking beyond this top layer of senior management, board members may not be familiar with individual company officers; still, directors should review the company’s leadership development program to ensure that this program is working satisfactorily.

Following their discussion on succession planning, Lead Director Network members turned their attention to the recent corporate governance reforms pending before Congress and the SEC, and they discussed how boards can address the proposed reforms. As described in the ViewPoints report, members were most concerned about the potential changes with respect to proxy access, and many members voiced concern about the aggregate effect the reforms — including proxy access, majority voting and the elimination of broker discretionary voting — may have on corporations and boards.

Additional information regarding the Lead Director Network may be found on the websites of Tapestry Networks and King & Spalding.