Board agendas can move along in rote fashion for long periods of time without any bumps and bruises. However, a major public scandal quickly forces complacent boards to sit up and take notice of the areas in which they are not proactive enough. The SEC is taking executive CEO succession planning more seriously than ever before, and that means that boards of directors should be taking it seriously, too.
Several big-name corporations like AIG, General Motors, Sears and Yahoo got caught off guard with an outgoing executive CEO and no succession plan. The latest casualty in lack of executive CEO succession planning is ride-sharing giant Uber. CEO Travis Kalanick resigned with no obvious successor in the wings. To make matters worse, many senior executives resigned from their posts before Kalanick resigned, leaving the company with ultra-weak leadership.
Poor or nonexistent executive CEO succession planning causes investors to raise their eyebrows and causes a corporation's ratings to drop. It should also raise a red flag of liability concerns for board members.
Executive CEO Succession Planning by the Numbers
As the SEC and other regulatory bodies place pressure on boards to make executive succession planning an integral part of good corporate governance, research is showing us that boards are not giving enough importance to the matter of executive CEO succession planning. The SEC views succession planning as a significant policy issue - so much so that they require boards to entertain shareholder proposals on succession planning. According to a report by the Stanford Graduate School of Business, global turnover of executive CEOs is 9% to 14%. Just how unprepared are corporations for an executive CEO turnover? The National Association of Corporate Directors did a survey that showed that 44% of corporations don't have any form of executive CEO transition plan. In addition, it showed that 43% of large-cap company CEO successions were unplanned. A mere 17% of board directors responded that they felt they were highly effective at succession planning. Being unprepared for executive succession also affects investors and rating agencies. Investors were twice as likely to sell shares during times of CEO resignations and transitions. Rating agencies consider CEO transition times to be a vulnerable time that is reflected in their ratings. Boards that fail to outline a plan for executive CEO succession and revisit it on an ongoing basis carry a high level of risk, as they will be held accountable for transitions that manifest poorly. Board directors may be tempted to put off developing an executive CEO succession plan because they feel uncomfortable with it. It's easy to make excuses (e.g., there are other pressing matters to deal with or the board agenda is full). Some directors may worry that the current CEO will go into a lame-duck mentality and slack off. Succession planning requires trust between the board and the CEO. In today's corporate world, boards must make succession planning an urgent matter.Best Practices for Executive CEO Succession Planning
We can look to several companies that do executive CEO planning well to know just how well it can work. Apple, Disney, General Electric, Microsoft and McDonald's all have firm executive CEO succession plans in place. They reap the benefits in gaining investor confidence. In fact, McDonald's not only keeps up-to-date summaries on current CEO candidates, but also profiles of rising leaders. Forbes outlines a four-phase succession planning process, as follows:- Analysis
- Development
- Selection
- Transition
Media Highlights
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