The Importance of a CEO Succession Plan for Shareholders
How to Manage Disclosure of Your CEO Succession Plan
It has been nearly 10 years since the implementation of a policy by the Securities and Exchange Commission (SEC) requiring companies to include more information regarding succession planning initiatives in proxy statements to shareholders. Prior to this, when shareholders would request that companies disclose their CEO succession plan, organizations would exclude this information, claiming it pertains to operational business needs. They would say that divulging such information could weaken a company’s competitive advantage. For many years, the SEC supported these rebuttals. However, the SEC would change their stance on this issue in 2009, releasing a bulletin stating:
“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.”
What the 2009 SEC bulletin suggests is that when companies fail to create a CEO succession plan, a transition of power is more likely to negatively affect them. For example, in 2011 Apple faced criticism from shareholders for its failure to disclose its plans to replace co-founder and CEO Steve Jobs during his medical leave of absence. This would lead to calls for the release of names of internal candidates they were considering for the position. This is something Apple didn’t want to do, at risk of tipping their hand to competitors. The entire debacle could have been avoided if Apple had provided even the most basic information to reassure shareholders of a succession plan. Describing the planning process details, rather than naming specific successors being considered, would have been sufficient in calming shareholders’ nerves.
What we can learn from Apple is that a robust CEO succession plan is essential for successfully navigating these transitions of power with minimal disruptions. A robust CEO succession plan allows you do to three important things to satisfy and reassure shareholders.
Announce the Current CEO’s Departure Date Early
Barring an unexpected medical event, your CEO’s departure should never come as a sudden surprise to shareholders. Part of succession planning means knowing your CEO’s intention for the future. For instance, internally, you should have an idea of their departure or retirement date. This doesn’t mean you need to disclose the information as soon as it’s available. Knowing what the date is gives you the opportunity to announce it properly. It’s best to inform shareholders of a CEO’s departure before the date it becomes effective. You want to give the market an opportunity to react to the news, while also reassuring that current leadership will remain while the next generation takes over.
Choose an Internal Successor
A succession plan can reassure shareholders by describing the process that will be following when managing the your CEO’s departure. However, if your plan doesn’t prepare employees to take over when the position become available, it’s not a strong plan. It may go without saying, but an effective succession plan allows you promote from within. While there are pros and cons of choosing an internal versus an external CEO for any given position, your plan needs to do its job. It must provide you with qualified internal candidates. Above all, make sure that your CEO succession plan is more than a box you’re checking to satisfy your shareholders’ questions. Remember to put the work into developing your talent.
Name a Permanent Replacement
It seems that more and more often we hear about the appointing of interim CEOs when their predecessor leaves. Some view this as a chance to trial a new leader before committing to their strategic vision. However, the company’s decision can signal a lack of confidence in its senior executives. A robust succession plan provides a successor who worked with past leadership, guided the company to its current point, and will build upon the existing vision. This leadership progression can therefore support continued growth. It won’t create the abrupt changes that occur when a company’s strategic direction pivots with each senior leadership turnover.
How SIGMA Can Help
Having a robust succession plan in place for your CEO should be more than a plan for the worst-case scenario. Taking steps to plan for a smooth transition of power is an opportunity to show shareholders that you’re aware of the challenges your current CEO faces and those you anticipate for their successor. For more information on how SIGMA’s CEO Succession Planning and Succession by Position offerings can help you plan for the departure of your CEO, contact us today.