Boardroom Best Practices

The Importance of Proper CEO Succession Planning

If you’d like to initiate an informative discussion, invite your directors to identify a few of your board’s top priorities. The responses may vary to some degree from one board to the next, with board maturity and the state of the organization both likely to impact responses.

All corporate secretaries and other governance professionals, though, should hope to hear CEO succession planning atop or very close to the top of the list of directors’ priorities. Not only does the board need to recruit the right person to lead the organization into the future; it should be prepared to undertake a search with little or no notice.

For, while an ideal scenario will unfold with the incumbent planning and communicating such plans to the board with plenty of notice, that’s not always the case. Searches may also be triggered by virtue of your CEO having been successfully wooed by another organization or purpose, or as the result of health matters. In some instances, the board may determine that it’s necessary to replace the CEO on the basis of performance or other issues.

In its Governance Insights 2018 publication, Davies Ward Phillips & Vineberg (Davies) identified proactive measures boards and management can take as activists themselves. Third on Davies’ list of top five tips? Plan for succession, and keep that succession plan current. As Davies noted, “…the unexpected loss of a CEO or an accelerated need to replace the CEO can have significant adverse consequences for an issuer and an unprepared board.”

Planning for Proper CEO Succession Planning

It’s not unusual, during the course of a governance career, to support your board through at least one CEO succession. The caliber of an organization’s CEO succession planning and recruitment process can impact shareholder relations and confidence. There will also be impacts on employees’ and other stakeholders’ confidence, engagement and – in the case of employees – performance.

As a form of risk management, then, and whether or not a CEO’s departure is prefaced by significant notice or positive circumstances, the board needs to be working from an informed perspective. It helps, but it’s not enough, for a board to have familiarity with a CEO’s direct reports and their leadership potential.

How do other boards feel about their CEO succession planning? Consider the October 2018 release of the PwC 2018 Annual Corporate Directors Survey. Seven hundred and fourteen directors of American public companies participated in the summer 2018 survey. The results reflected governance perspectives from more than 12 industries and a cross-section of companies, 76% of which report annual revenues exceeding $1B.

PwC asked directors to rate their respective companies’ performance on C-Suite succession planning. Thirty-four percent selected the “Excellent” rating, while 43% selected “Good” and the remaining 23% selected the “Fair/Poor” rating. Males were less critical on this front than females; 34% of female directors and 21% of male directors selected the least favourable of the three rating options.

What can a board do to get CEO succession planning right? Your board will want to charge a dedicated committee with responsibility for succession planning. Some boards will establish an ad hoc committee. In some organizations, the Human Resources or Nominating and Governance Committee will be tapped for this responsibility; perhaps your Compensation Committee, if you have one, may play a role. Whatever the lead committee, your board Chair will likely be closely involved in the committee’s regular reviews and consideration of succession planning reports.

What To Look For In A CEO

Rather than seeking to replicate the current CEO’s strengths, the board will require context and an eye to the future: What are the organization’s opportunities and challenges in the next few years? Is the board identifying needs based on a current, board-approved strategic plan?

If so, what’s envisioned, and what attributes are required to successfully execute the plan? Will sector-specific experience be a must, or is there flexibility on this front?  Board agreement on these types of questions will help determine the depth of leadership experience and specific skills required of an incoming CEO.

Your lead committee also needs to secure identification of internal talent, typically a small group of people. The CEO should be able to identify such individuals’ strengths and weaknesses, and the lead committee will want to know about  targeted development already underway or desirable in order to address known gaps. Your board may turn to an executive search firm to identify external candidates, and organizations sometimes recruit strong prospects into one role with an eye to longer term potential. The broader and deeper the candidate pool, the better positioned a board will be to respond to the organization’s future needs. Your lead committee should engage the board as a whole in timely discussions of its regular reviews and recommendations, and the board and prospective internal candidates should be exposed to one another.

All this requires confidence and reciprocal trust between the CEO and the board, beginning with disclosure of the CEO’s intentions to the Chair and the board. Next, while a CEO can reasonably anticipate providing input on the succession planning, it’s important to establish that it’s the board that owns this responsibility. Trust and effective communications also play a part in ensuring that neither the board’s exposure to the internal talent pool nor its succession planning undertakings are perceived as diminishing the CEO’s authority – or, when a departure is imminent, implying that the incumbent is a “lame duck” leader.

How Boards Should Approach CEO Succession Planning

When it comes to securely communicating the sensitive information associated with CEO succession planning, enterprise governance management (EGM) can contribute to directors’ confidence. EGM is the application of technical tools and resources to address governance needs, and a board portal  can be used to store succession planning reports and other key documents. Directors can also use Diligent Messenger, a secure communications platform, for their confidential succession planning communications.

In addition to ensuring your board regularly reviews its CEO succession plan, you’ll want to assess how the board and organization would manage in the case of the unexpected. Does your board have an emergency CEO succession plan to be enacted should the CEO die or an emergency occur? Canada’s Institute of Corporate Directors (ICD) has published examples of emergency CEO succession operational and board policies . Designed for not-for-profit (NFP) organizations, they’re worth a review regardless of your sector – and particularly if your board currently has no such plan or policy in place.

You may not want to think about the need for such a plan, but the death of a 30-year-old Canadian cryptocurrency exchange company CEO last December serves as an unfortunate reminder that the unexpected and unwanted can happen. The outcome has been ­widely covered given reports that cryptocurrencies valued well over $100M have not been accessible because the CEO, determined to avoid hacking, was apparently the only person who knew the encrypted pass codes. His company filed for creditor protection early this year and has no directors or officers. Clients’ inability to access their funds and the company’s current status may not have been any different had a succession plan been in place, but this unusual and unfortunate case reminds us that organizations should be prepared for the unexpected.

Independent of preparing to fill a future CEO vacancy, planned or otherwise, CEO succession planning can strengthen the organization by sheer virtue of the targeted development afforded internal talent.

If you or your board Chair initiate that boardroom conversation about your board’s top priorities, you may want to also pick up on one of PwC’s survey questions. Ask your directors to rate your organization’s performance on CEO succession planning. Whether your rating scale includes excellent, good and fair/poor, or other clearly defined rating indicators, the results will be telling.

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