Leadership Succession Planning: A Sound Strategy For Stability

leadership successionCEOs leave companies every year for reasons that range from death, personal or health events to internal power struggles, corporate changes in direction, new opportunities and, in some cases, ethical lapses. Over the last several months, we have all seen a wave of CEO, director and senior leadership “sudden” departures that caught companies and their stakeholders by surprise – departures related to sexual misconduct, harassment or abuse allegations – that led Boards and leadership to make difficult and quick succession decisions under the glare of negative media attention and while facing questions about the company’s future. Among the more recent “forced transitions” include Steve Wynn (Wynn Resorts), Travis Kalanick (Uber), Laurent Potdevin (Lululemon), and Penny Lawrence (Oxfam).

Surviving leadership transition is difficult – even in the best of circumstances. However, seeing a wave of senior level departures in rapid succession and having the opportunity to compare who fares well and who struggles raises the question of whether Boards of Directors are fully prepared for succession emergencies. Recent events and published studies suggest that, in many cases, they are not.

Studies have shown that leadership transition planning, while it remains a critically important Board function, is often ignored. Why? Because it is a challenging and time-consuming process, and the topic is uncomfortable and difficult to discuss – especially with a high profile CEO or company founder. This comfort zone, however, fails to take into account that when an unexpected transition occurs, it is the most critical and time sensitive issue for the company, and it is often accompanied by a hailstorm of uninvited media attention and public scrutiny leaving no time for lengthy deliberation, searches, debates on strategic company objectives or disagreements on collaboration.

Boards and company leadership can and should be more proactive in defining their company’s future success. They should accept the inevitability of leadership succession in principle and use it as an opportunity to shape the future direction of a company and solidify company culture, financial returns and long-term growth strategy.

The following steps should be top of mind for companies, their leadership team and their Boards.

Plan Ahead for Emergency Successions 

Proactive planning will stabilize an organization faced with a dramatic change in corporate leadership and it will give stakeholders less uncertainty to worry about. One cannot underestimate how tumultuous a sudden shift in leadership is.  It is emotional and creates an intense sense of personal loss among employees, executives and Board members. In cases where a CEO steps down or is transitioned due to scandal, the company is faced with the crush of media attention and financial instability. Tensions run high. Fingers are pointed. Stakeholders are skittish. And other executives wonder if they are next to go.  In these situations, it is critical to focus on a message of stability and a positive future vision – steps that are virtually impossible without foresight and planning.

“Leadership succession planning is critical to any company’s long-term success.”

Build Sustainable Leadership 

Leadership succession planning is critical to any company’s long-term success. When done correctly, it does not have to be overly burdensome. For example, succession planning can become part of the management review and compensation process. It can be done in multiple steps over several quarters with critical issues addressed first and less important issues later. The importance is to keep it top of mind and moving forward. With the general counsel’s and the leadership team’s assistance, the Board should assume responsibility for the development of a plan that provides a procedural road map and takes into account key internal and external considerations. Take the time to groom potential internal candidates to encourage growth, development and opportunity while keeping an eye on maintaining stability if the worst happens. Ideally, the Board should pre-designate an executive who can serve in an interim (or potentially permanent) capacity in the event of an unplanned transition.

Though not always necessary, some Boards form independent committees that are charged with creating the succession plan, while most still consider it on the entire Board level. Ideally, the Board already has well thought out executive compensation and risk management plans, and these should all tie together once completed. Though succession plans can be prepared separately and with no overlap on overall business strategy, the best plans are part of a discussion that encompasses the company’s mission, short- and long-term business strategies, executive compensation, talent development, corporate governance requirements, crisis management, corporate communications, and compliance policies.

Understand and Adopt Critical Elements of a Succession Plan 

While there is no uniform checklist or playbook for these types of situations, the gold standard includes putting together a checklist of interim leaders, mission critical decisions, as well as required and advisable notifications. Overall, it is important to know who will be driving interim decisions, what decisions need to be made in the short and medium term, the appropriate governance, corporate and other legal rules to follow, and how any decisions will be communicated (internal and external). Of course, make sure any checklist includes details like personal phone numbers of key stakeholders. An often-overlooked component of the plan is the identification of critical external stakeholders and possible contractual triggers associated with those relationships. The external stakeholder list can and should include a wide-ranging audience with different interests and needs for information and may include management, employees, clients, vendors, investors/lenders, regulators, the public and the media. Of course, any succession plan should align with existing crisis management and communications plans.

Here are some additional checklist items to consider:

  • Procedures for calling emergency Board meetings and corporate governance requirements for decision-making in a leadership transition. As part of this preparation, it is a good idea to update governance procedures in the event an independent Board investigation is required.
  • List of key internal contacts, including a list of potential interim leader(s) and their roles in managing inquiries, interests and announcements
  • List of essential outside advisors on critical issues. This may vary by company, but examples of expected advisors include corporate governance, SEC/NASDAQ reporting, employment, media, investor relations, and search firms.
  • List of known immediate, short and medium-term decisions in the event of an unplanned leadership transition.
  • List of filings required by the federal securities laws, NASDAQ rules and related issues (i.e. do you stop trading pending announcement), if applicable. The timing of notifications will be critical to get right.
  • List of required regulatory notifications, if applicable.
  • List of “next of kin” notifications in the event of a death, and internal responsibilities for coordinating and addressing “next of kin” issues such as benefits, life insurance, communications, etc.
  • Triggers for “key man” insurance, including evaluation of whether “key man” insurance is advisable in the first place.
  • List of key stakeholders (sales, suppliers, partners) and essential elements of notifications.

Conclusion

No one relishes starting the conversation of emergency succession planning because no one expects or wants this type of transition to occur. But just like we plan for contingencies in other areas of our lives – such as life insurance or disability insurance – this type of planning is essential to ensure business continuity and sustainability for leadership’s and the Board’s vision for the company. In sum, succession planning is a very real component of sound corporate strategy and should be implemented with the same consideration as revenue targets and creating shareholder value.

Cynthia J. Cole was the general counsel and became the CEO of Spectra7 Microsystems when company founder and CEO Tony Stelliga died suddenly in 2016. She is now Special Counsel at Baker Botts in Palo Alto representing global companies, start ups and private equity in complex strategic business transactions, technology and commercial, data privacy especially GDPR compliance for US Companies and big data. Amy Conway-Hatcher is a litigation partner at Baker Botts and a former federal prosecutor. Her practice focuses on corporate investigations, crisis management, and compliance and white collar matters, including defending corporate and individual clients in criminal and civil enforcement matters before the Department of Justice, the Securities and Exchange Commission and other federal and state enforcement authorities. She is consistently recognized by Chambers, Global Investigations Review Who's Who Legal: Investigations and Best Lawyers in America for her experience in white collar and government investigations.