Of all the principles involved in corporate governance, one of the most important, yet overlooked, is that of board succession. At its most basic function, board succession planning helps the company prepare for situations where an executive or board member suddenly cannot perform his or her duties. On a larger scale, the implications of such preparation (or lack thereof) can be very broad, often affecting shareholder rights as well as public perception of the organization.
Common objectives of succession planning include:
- Identifying persons with potential to assume greater responsibility roles
- Creating development programs and opportunities to create pathways into succession
- Training existing leadership on the importance of creating/developing future leaders
- Creating a well-researched database that can be utilized to inform the selection process
Benefits of having a well-thought-out, workable succession plan include increased investor confidence and overall higher and more sustainable shareholder value. Having a clear succession plan in place can also help to stave off corporate governance investigations, which can drain company resources.
But despite the obvious importance of succession planning, a surprising number of boards seem to be overlooking the issue. According to a recent PwC survey, only 48 percent of directors felt that they were devoting enough time to CEO succession; a staggering 45 percent believed that their boards were adequately prepared in the event of an unplanned CEO succession situation. These figures could be attributed to the various challenges and pitfalls associated with board succession planning.
Challenges Associated with Board Succession Planning
In order to maximize board succession efforts, it helps for organizations to be able to identify common mistakes, errors, oversights, and shortcomings with regards to succession plans. Some of the most common succession pitfalls include:
- “Isolating” CEO succession planning — (i.e., placing too much emphasis on the role of the CEO, while neglecting other executive roles)
- “Check the Box” mentality (i.e. making a succession plan just to show regulators that a plan exists)
- Using outdated research data
Another study by Annalisa Barrett, founder and CEO of Board Governance Research LLC, identifies additional succession shortcomings evident with many boards:
- A lack of board succession transparency
- Complete absence of a succession plan
- Failure to devote sufficient resources to planning
- Lack of clarity with regards to executive roles and responsibilities
By addressing these pitfalls directly, boards have a better chance at creating a sustainable board succession plan that is based on research and that can adapt to foreseeable risks and issues in the future.
Undesirable Consequences of Poor Succession Planning
Ultimately, the main negative consequence of a weak or non-existent board succession plan is that of financial underperformance. This, in turn, harms investor confidence and loyalty in the company. It also erodes regulator confidence, and leaves the company open to the risk of vacancies in key executive roles.
Also, as with any corporate governance indicator, a lack of board succession planning transparency can leave a company vulnerable to undue influence, fraud, and other questionable practices. For instance, many major securities fraud claims have stemmed from securities disputes tied to the exit of a CEO or other director.
Board Succession Legal News
We are continuing to see board succession issues arise in legal news. Some notable headlines and issues include:
- Proposed SEC Law: The SEC is proposing a new rule that would require SEC-registered investment advisers to adopt and execute written plans for business continuity and transitions in the event of significant disruptions in their advisement operations
- Succession plans still remain unclear regarding chairman and CEO of Fox News Roger Ailes’ exit and replacement
- The Financial Reporting Council in the U.K. has just released a report entitled “Corporate Culture and Role of Boards.” The report echoes the need for clarity when defining corporate values and attitudes in determining if a new CEO is a “cultural fit” for the company
It is clear that board succession is a vital aspect of any company’s long-term sustainability; it is also evident that succession planning is something that can be improved across the board for many groups. Even a well-thought-out succession phase can present significant legal challenges and issues. If you have any questions or concerns regarding board succession or other governance issues, contact us today at Kessler Topaz.
As a leading U.S. firm in the representation of shareholders, we have broad experience utilizing the courts to achieve governance reform. We also work directly with corporate governance experts, shareholder advocates, and other professionals to promote policies which encourage corporations to adopt shareholder-friendly governance strategies.