Onward and Upward
A new notice from the Securities and Exchange Commission calls for more shareholder involvement in the adoption of CEO succession plans as a way to mitigate corporate risk. But the disclosure of such plans will create additional risks for organizations -- and shine a light on their vulnerabilities.
By Kristen B. Frasch
Management experts and employment attorneys are sounding the alarm to CEOs, boards and HR executives to get their houses in order -- fast -- when it comes to CEO-succession planning, following a recent U.S. Securities and Exchange Commission notice calling for more shareholder involvement in the process.
The
notice
, issued Oct. 27 by the SEC's Division of Corporation Finance, essentially reverses the agency's prior position, established in 1998, that allowed companies to refrain from having to disclose to shareholders the details of their CEO-succession plans.
In that prior guidance, the SEC said shareholder proposals related to the termination, hiring or promotion of employees could be excluded because such activities involved, for the most part, "the management of the workforce."
It added the caveat, however, that some proposals could "transcend the company's day-to-day business matters and raise policy issues so significant that it would be appropriate for a shareholder vote."
Now, this latest legal bulletin states that "recent events have underscored the importance of this board function to the governance of the corporation. We now recognize that CEO-succession planning raises a significant policy issue ... that transcends the day-to-day business matter of managing the workforce."
"It's no secret," writes human capital management consultant Alicia Whitaker on The Huffington Post, "that a number of companies have had CEO succession issues, notably the Bank of America, which clearly was missing an emergency backup plan when CEO Ken Lewis surprised the board with his intention to leave by the end of the year."
The issue, she writes, has "broadened beyond financial risk to the quality of leadership in place in public companies. You don't need an MBA to know that not having a strong and effective CEO is a major risk."
But this SEC move raises the stakes -- and the risk -- for corporate boards, "ushering in a sea change in how directors will view CEO succession planning," says Stephen Miles, vice chairman of Chicago-based Heidrick & Struggles and managing partner of the firm's leadership-advisory services.
Though Miles lauds the fact that the new mandate will probably help drive needed changes and improvements in how "real succession planning ought to be done," he also sees that it "basically provides another road into the boardroom, a way for an activist shareholder to get into the board and start waving a stick and becoming really angry."
The rule will shine "a new light on CEOs' and boards' vulnerabilities and [expose] leadership weakness ... . Whereas well-run boards have always labored to develop succession plans that mitigate the risks inherent in CEO succession, all boards now potentially face much greater scrutiny in regard to these planning efforts," he says.
In fact, a 2009 survey by the National Association of Corporate Directors reveals that 43 percent of U.S. public companies have no formal CEO succession plan and 61 percent have no emergency CEO-replacement plan.
In terms of getting more companies to start thinking about CEO succession, the SEC move is a good one, says Miles, "but it could also lead to a false sense of security, and that's what scares me. Shareholders, boards, CEOs, they'll all say, 'We have all our SEC boxes checked. We have a plan in place.'
"But there are two kinds of succession," he says, "one [forced by circumstances and performed] under stress, and the other that boards and CEOs think they have in place until something unexpected happens -- a CEO leaves, retires, dies and so on. Then, they discover they don't have a succession plan at all."
According to Miles, few executives truly understand what is really involved in planning for a CEO's successor.
"It is one thing to be able to claim a succession plan of one form or another is in place," he says. "It is entirely another to be able to articulate a plan in a manner that assuages shareholders, analysts and other interested parties.
"And it is still a greater challenge to have a plan -- really a planning process -- that is robust enough to take into account the complexity and subtlety of CEO succession," says Miles. "Our sense has been that the Sarbanes-Oxley Act of 2002 has prompted boards to begin to 'talk the talk' when it comes to succession planning, but that the recent SEC bulletin is going to require them to 'walk the walk.' "
Miles adds the HR department's work will be significantly increased as a result of this mandate. "There will be added work in standing up to the external scrutiny," he says. "The [HR] profession is going to be the focus of a whole new spotlight."
November 18, 2009 Copyright 2009© LRP Publications
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