With high-profile CEOs unexpectedly stepping out of their roles in recent months—and catching their boards off guard—Corporate Board Member and Farient Advisors asked 150 public company directors in June-July 2024 how they are addressing the risk at their respective companies. What follows are findings from the second year of our joint research on how boards prepare for turnover at the top. [View 2023 findings]
Proportion of directors who say recent CEO departures at prominent companies has raised risk awareness inside their own boardrooms
Directors are divided as to the importance compensation plays in retaining the CEO
Proportion of directors who say they would be willing to take a one-year low SOP vote for a special award that would help them retain the CEO
The increased level of turnover among public company CEOs has prompted new conversations inside U.S. boardrooms. Nearly two-thirds of directors participating in the survey said the high pace of executive turnover in the past couple of years has sparked new conversations within their ranks—and even more so among those serving on the boards of large public companies ($1 billion or more in market capitalization).
For a plurality of directors at large companies, the issue is so critical to business continuity that it is being addressed by the full board, while a few others say they are keeping the conversations within the confines of the committee overseeing succession planning.
The situation differs from peers at smaller companies, where there is a fair split between practices—24 percent noted discussing the issue at the full-board level, while 27 percent are sticking to the committee in charge of succession.
While slightly fewer directors at smaller organizations responded in the same manner, the majority (51 percent) nevertheless reported that they, too, had been engaging in new conversations about the issue—an indication that the problem affects companies regardless of size.
Though an important conversation for boards at companies of all sizes, assessing the CEO’s risk of departure isn’t enough to prepare for an unexpected departure at the top. In carrying out their fiduciary duties, directors should seek to ensure the company has at least two candidates at the ready for any mission-critical role so as to minimize the impact of an unforeseen event on the organization.
Farient Partner and COO RJ Bannister recommends boards make an honest skills inventory of their current C-Suite executives to understand the competencies and organizational capabilities the company requires—now and in the future.
It is incumbent upon boards of directors to oversee the CEO’s succession, while the succession of other senior executives typically falls upon management. That differentiation doesn’t, however, mean that the board has no responsibility in ensuring the robustness of management’s plan.
Surveyed directors reported growing concern over the turnover risk of mission-critical individuals below the CEO—much more than the CEO specifically—making the oversight of management’s planning a must for boards to ensure business continuity.
For large company directors, the concerns are primarily over individuals one level below the CEO—within the CEO’s direct reports—as well as one to two levels below that. The proportion of those directors who consider these groups at risk rose 13 and 10 points, respectively, in 2024, when compared to 2023.
At smaller companies, boards’ concerns trickle even further down the organization and extend to employees below the executive level.
Across all company sizes, the survey found growing concerns about the high level of unplanned turnover across the non-executive workforce and a greater awareness of the importance for boards to expand their oversight to levels well below the CEO and senior executive team.
Many boards and/or committees focus on CEO succession, but succession issues and retention concerns cascade down well below the CEO level. Boards that want to get ahead of a potential talent gap should ensure that in addition to planning the CEO succession, a committee also oversees succession two or three levels below that.
Farient CEO Robin A. Ferracone says best practices for C-Suite succession planning require a five to eight year, two-level process to ensure potential executives gain additional competences and experiences to round out their C-Suite candidacy—a process in which she says the board plays an important role, providing input to the CEO and challenging the plan’s resilience into the future.
Business continuity and crisis preparedness are critical elements for the board to oversee. In carrying out their duties, directors must ensure the company has a reliable course of action that enables corporate officers to act—or react—to unforeseen circumstances in a timely manner, with minimal impact on operations.
Boards also require a similar plan in the event a situation prevents the CEO from carrying out his/her duties. When asked to share what their first move would be if their CEO were to suddenly depart, nearly half of directors across all company sizes said their plan calls for the appointment of an internal candidate who has been marked for succession.
While that is the best course of action and demonstrates readiness to act in a timely manner, doing so requires that the identified candidate is not only ready to step into those shoes but also well-anchored within the company—and not with an eye toward the door. This nuance makes retaining and motivating identified successors vital to boards’ ability to execute the strategic plan.
When asked what companies are doing to ensure these individuals are monitored for potential lapses in engagement, providing competitive compensation, of course, was a key element found by the survey. More than half of all directors polled said offering the right compensation package is critical to retaining members of the C-Suite. Those numbers are consistent across size groups, though smaller company boards tend to put more weight on compensation for their senior executives than their larger counterparts (69 percent vs. 51 percent).
There’s no doubt that compensation plays a necessary role in retaining key talent, but at higher levels—and even more so at large, public companies—it is often insufficient because it isn’t the only reason executives remain in their roles. Corporate culture, career path, development opportunities and realizable pay (based on performance) also are powerful retention motivators.
Directors should therefore ensure, as part of their succession planning and business continuity discussions, that such elements beyond compensation are being considered, and that the level of engagement and motivation for these next-in-line individuals is monitored continuously.
Boards and committees should not overemphasize the importance of compensation in retaining key talent, says Ferracone. Boards need to think broadly about retention mechanisms and make use of all the tools in the toolkit. For example, compensation committees should routinely review the talent and succession plans, and if appropriate, link compensation to the succession map.
Boards and committees need to also connect with the CEO and others who are one to two levels below the CEO, as appropriate, to understand their motivations as well as their feelings about their personal prospects within the company. While towing the governance line to avoid overstepping into management, board members play an important role in this process. They can help see things that CEOs may not see, making a good collaborative relationship between the board and CEO critical to success in these matters.
To retain their CEO, most directors surveyed said they would consider offering a special one-time award. In fact, three out of five said they have either considered making a special award or have made one in the past. (The numbers were consistent across size groups.)
Survey data shows this practice goes beyond the CEO: 70 percent of directors who said their company uses compensation as a retention tool said they also give special equity grants to their succession candidates. (These numbers were also consistent across size groups.)
It is clear that boards are concerned about retention, particularly one, two, and even three levels below the CEO, and as a result, feel the need to consider retention awards for key talent and succession candidates.
But that practice can draw investor criticism. Proxy advisors and investors in general object to one-off exceptions or surprises in the pay system because these actions often weaken pay-and-performance alignment. When asked why the boards that had considered a special award had opted against it, 57 percent said they were concerned about investors and proxy advisors’ reaction—and 21 percent said they were also concerned about employees’ reaction.
Still, despite shareholder scrutiny on matters of compensation, most of the directors we surveyed approve of special accommodations, when warranted, even if they can put a say-on-pay vote at risk.
Many companies will choose to sacrifice say-on-pay support in favor of securing top talent and protecting succession plans. Compensation committees should proactively consider how they can both retain key executives as well as garner say-on-pay support, not one or the other.
For instance, committees may want to think about how retention mechanisms can be built into the ongoing pay program and how they can be configured to strengthen pay-and-performance alignment. Such programs would then be disclosed as the standard way in which the company does business.
In the event that a special one-time award is necessary, committees should consider developing a policy that considers such items as frequency, magnitude and the use of performance conditions. The company should then disclose its policy and demonstrate how any one-time awards comport with its policy.
Corporate Board Member, a division of Chief Executive Group, has been the market leader in board education for 20 years. The quarterly publication provides public company board members, CEOs, general counsel and corporate secretaries decision-making tools to address the wide range of corporate governance, risk oversight and shareholder engagement issues facing their boards. Corporate Board Member further extends its thought leadership through online resources, webinars, timely research, conferences and peer-driven roundtables. The company maintains the most comprehensive database of directors and officers of publicly traded companies listed with NYSE, NYSE Amex and Nasdaq. Learn more at boardmember.com.
Chief Executive Group exists to improve the performance of U.S. CEOs, senior executives and public-company directors, helping you grow your companies, build your communities and strengthen society. Learn more at chiefexecutivegroup.com.
Farient Advisors LLC is an independent premier executive compensation, performance, and corporate governance consultancy. Farient provides a full array of services linking business and talent strategy to compensation through a tailored, analytically rigorous, and collaborative approach. Farient has locations in New York, London, Los Angeles, and Louisville, and works with clients globally through its partnership in the Global Governance and Executive Compensation (GECN) Group. Farient is a certified diverse company and is recognized by the Women’s Business Enterprise National Council.
Chief Executive Group exists to improve the performance of U.S. CEOs, senior executives and public-company directors, helping you grow your companies, build your communities and strengthen society. Learn more at chiefexecutivegroup.com.
