In her regular column on corporate governance issues for “Practical Law The Journal”, Holly J. Gregory, co-leader of the global Corporate Governance and Executive Compensation practice at Sidley Austin LLP, discusses the board’s role in leadership succession planning and provides a roadmap for an unexpected CEO departure.
How well the board of directors handles a leadership transition can have a direct impact on the company’s success. Awkward transitions and failed succession candidates leave a company vulnerable to media attack and shareholder activism. By contrast, smooth, thoughtful leadership changes, even those involving a CEO termination, can provide performance momentum.
While boards are spending more time and effort on succession planning, few boards are fully prepared with a roadmap for handling an unexpected transition that involves a CEO termination. This article explores:
- Director duties regarding succession planning and unexpected CEO transitions.
- The elements of an effective succession planning process.
- Preparation for unexpected CEO succession and “guided resignation.”
In fulfilling their duty of care, directors need to address major business risks, including the loss of a senior executive, whether through a planned or an unexpected transition event. Decisions about who should lead a company and how to manage leadership changes are among the most important and challenging duties of a board. Effective succession planning requires regular, ongoing attention so that the board is positioned to select from among strong candidates when a change in leadership is needed.
You can also download a copy of the full article, “Planning for Leadership Succession and Unexpected CEO Transitions” here.
While the selection of a CEO and planning for CEO transitions are critical decisions that boards must make, the legal obligations that surround these decisions are essentially the same as for most board actions. Directors must act:
- With appropriate diligence.
- In good faith.
- In the best interests of the company.
Succession Planning Process
The board has the flexibility to adopt a succession planning process that best suits the particular needs of the company. For example, it is up to the board to determine how much time and attention to spend on succession planning, and whether or at what point to:
- Retain advisors for assistance.
- Consider internal candidates.
- Conduct an external search.
- Determine that enough information has been obtained to support an informed judgment.
Because succession planning is a central component of the board’s role, generally the full board maintains responsibility for, and is involved in, succession decisions. However, boards routinely delegate responsibility for specific tasks to board committees. For example, the nominating and governance committee or the compensation committee may be tasked with hiring a search firm to assist in identifying candidates and specifying desirable candidate criteria. Often, given its role in performance evaluations of top executives, the compensation committee is involved on an ongoing basis in assessing potential internal candidates, identifying their leadership capabilities, and pinpointing areas for further development.
Preparing for Unexpected CEO Succession
No matter how much attention a board gives to succession planning for the leadership of the company, a board should expect that at some point a CEO change will occur within a different timeframe than planned. This may occur because the CEO decides to pursue another opportunity, becomes incapacitated or dies, or because the board decides that it is time for a change due to performance concerns.
While many boards have an emergency plan in place in terms of having identified a potential successor, an interim candidate, and a plan for an expedited selection process, in the case of an unexpected CEO transition event, boards often overlook the need to have in place a decision process and a crisis management plan.
You can read the full article by Ms. Gregory in the March issue of Practical Law The Journal – Transactions & Business.