Emergency CEO Succession Planning

It's important for boards to discuss not only who will take over in an emergency but to examine their criteria for this important choice

by Beverly Behan

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Boards never know when they may have to invoke an emergency CEO succession plan. But if and when they do, one thing's clear: It will be a lot easier if they've discussed this issue before a crisis occurs. "Unexpected CEO departures provide a window into the quality of governance," according to a Moody's (MCO) report published in December, 2007. "Every board should have in place an emergency CEO succession plan, just in case the CEO is unexpectedly incapable of doing his or her job. If the board appears to make the plan up in the heat of firing a CEO, this highlights the board did not focus on emergency CEO succession planning."

One board I worked with recently told me they had an emergency CEO succession plan. When I asked to see it, I was shown a one-page outline of who would call whom to have a meeting about replacing the CEO in the event of an emergency. A real emergency CEO succession plan should involve all or most of the following steps:

1. Identify the key criteria for interim leadership of the company.

Often, boards begin their discussion of emergency CEO succession by considering who in senior management or on the board could jump into the corner office.

It can be useful, however, to consider the four or five criteria in an interim leader that would be most important to this company and its stakeholders. In one instance, the board began its emergency CEO succession discussion stating that none of the executive team was ready and that the lead director was the best choice. When they really considered key criteria, they all agreed that industry experience would be critical for the interim leader to have credibility with most stakeholders.

However, the lead director had no background in this industry. Nor, in fact, did any other members of the board. As a result, the directors not only made a different choice in their emergency CEO succession plan, they began to ramp up director recruiting to fill in that industry expertise.

2. Evaluate the potential pool of candidates.

Who do board members and members of the executive team see as potential candidates to step in if something unexpected happens to the CEO? And how do they perceive these folks relative to the key criteria for interim leadership? It's always a good idea to canvass senior executives on this topic as their perspectives sometimes differ from the board's point of view—and that's useful intelligence for the board.

Note also that the best person to step in during a crisis and the person best suited to succeed the CEO under expected circumstances (on retirement, for example) may be two different people. In fact, they frequently are, unless the company is in the last stages of long-term CEO succession planning.

3. Consider the emergency loss of other top executives.

The best emergency succession plans consider not only the loss of the CEO but the other two or three top executives (such as the chief financial and chief operating officers) and finally what is typically called the "company plane crash" or "Eliot Spitzer" scenario, which involves the loss of the entire executive team—either due to a tragic accident or allegations of criminal activity—typically requiring a board member to take the helm. Don't immediately assume that the lead director is the right choice in this scenario, either.

One board had an outstanding lead director who was president of a prestigious academic institution. In the event of a real emergency that wiped out the executive team, however, they felt that Wall Street would be more comfortable with a former public company CEO at the helm. Consequently, they decided that another board member who had experience running a public company was a better choice than the lead director if a corporate Armageddon ever ensued.

Once developed, emergency CEO succession plans should never be made public or discussed beyond the boardroom. Even if all board members agree the CFO is the logical choice to step in during a crisis, he or she should never be advised of that; doing so creates expectations about who may ultimately succeed the CEO at retirement.

Moreover, it may make it difficult to change the emergency succession plan if circumstances warrant a different choice at the time of crisis. Emergency succession plans are extremely useful to discuss and develop, but they should never be set in stone. Moreover, they should be reviewed and discussed by the full board at least once a year and whenever a material change occurs in the executive team or the board.

Beverly Behan is the managing director of the Board Effectiveness Practice of the Hay Group and co-author of Building Better Boards: A Blueprint for Effective Governance. She writes "The Boardroom" for BusinessWeek.com/Managing/.