Deciding Who Leads
SEC Puts CEO Succession Center Stage
Executive recruiting is arguably the most critical task in business, and corporate boards rank CEO succession among their most important jobs. Yet data from a variety of sources show that roughly half of companies lack even the most cursory "hit by a bus" succession plan for their current chief executive. That is likely to change, thanks to a recent legal bulletin from the U.S. Securities & Exchange Commission, Staff Legal Bulletin No. 14E (CF), recommending greater transparency and shareholder disclosure about the management of succession risk "so that the company is not adversely affected due to a vacancy in leadership." The SEC's new guidance seeks to reduce corporate evasion of shareholder proposals that call for the adoption and disclosure of written, detailed CEO succession policies. Such policies could include criteria for the role, reveal the identities of internal candidates, and outline a formal assessment of potential CEO successors. Previously the SEC treated the hiring, promotion, and termination of employees—even top executives—as part of "ordinary business matters." SEC: "a significant policy issue"Says the new SEC guidance on succession planning: "We now recognize that CEO succession planning raises a significant policy issue regarding the governance of the corporation that transcends the day-to-day business matter of managing the workforce. As such, we have reviewed our position on CEO succession planning proposals and have determined to modify our treatment of such proposals. Going forward, we will take the view that a company generally may not rely on Rule 14a-8(i)(7) to exclude a proposal that focuses on CEO succession planning." The message inherent in this nonbinding but reform-oriented guidance: The board should institutionalize CEO succession planning as a continual, meaningful exercise lest shareholders rightly concerned about risk management invest elsewhere. Just consider the ongoing search for Ken Lewis's successor at Bank of America (BAC), and speculation about the bank board's bungling of its CEO succession responsibilities before Lewis announced his pending retirement on Sept. 30. Lewis plans to retire effective Dec. 31, and Bank of America has yet to name a successor. The real issues, however, are the crisis of confidence that the bank's lack of CEO succession planning may have engendered in the minds of shareholders and the risk to the institution's reputation (another governance hot button) that have surfaced through the resulting media spectacle. Especially these days, and surely for some time to come, anything that suggests a lack of proactive succession planning opens a Pandora's box. increasing shareholder influenceWith Congress debating a number of governance reform issues, and corporate boards already investing more time on continual risk assessment, what does this reversal of opinion by the SEC mean for companies? The impact will be felt in myriad ways. Shareholders will indeed demand corporate succession plans. After all, they're already asking to be heard when it comes to board succession. A bill sponsored by Senate Banking Committee Chairman Christopher Dodd (D-Conn.) now working its way through the Senate includes provisions that would empower shareholders to nominate directors using a company's proxy materials, among other governance reforms. The direct involvement of shareholders on issues of board succession portends their increasing influence on CEO succession, if only toward driving more transparency and accountability for a more open succession process. As a result, boards will spend far more time on CEO succession planning, not to mention more time on regular reviews of executive recruiting, development and retention plans, and policies that either build bench strength or risk sapping organizations of future CEO succession options. For most boards, this means more meetings, more dialogue, and more robust review of internal human resource practices. pressure for diversity?With management talent and succession looming as major board agenda items, expect to see richly experienced HR executives brought to the boardroom to beef up directors' views of these critical performance drivers. Invariably, management diversity will also work its way into board discussions, as institutional shareholders pressure directors to shed light on how leaders are picked from which pools of candidates and for what reasons. All of this is welcome news to executive head-hunting firms pummeled by the recession and a severe pullback in executive hiring over the past 15 months. Some, including Korn/Ferry International (KFY), are already reporting a surge in new business inquiries around CEO succession. "CEO succession planning continues to be one of the most important responsibilities that the board of directors holds. Planning for CEO succession is not an individual event, but a strategic process, and should be on every board's agenda for regular review on at least a quarterly basis," said Korn/Ferry Vice-Chairman Joe Griesedieck. The challenge for hiring companies will be to drill down on search firms' due diligence when it comes to sourcing new candidates for the CEO role. Shareholders will demand to know whether a bona fide search was conducted (one perhaps that included interested women and minority candidates qualified to take the lead) or whether the name-dropping that usually permeates CEO searches resulted in the retrieval of the usual suspects from a search firm's database. Given the SEC's new guidance on the critical nature of CEO succession planning and shareholders' rights to assess companies' succession risk, boards will have to work far more proactively and diligently in the future to demonstrate their succession risk competency to their own shareholders.