Investors, SEC Concerned About CEO Succession Planning
As John Thain took over as chair and CEO of the embattled small business lender CIT Group recently after a lengthy vetting process following bankruptcy and a federal bailout, I am reminded of the importance of a good succession plan. And, by the way, so are many investors and the SEC.
While Thain’s resume more than qualifies him to lead this restructured bank out of bankruptcy, it seems that most investors of such public companies would like public companies to have a succession plan in place prior to such disasters. That, among many other things, is what a study done by the independent management advisory firm Integral Advisors LLC and succession planning consultant Board Advisor LLC found recently.
In light of SEC Staff Legal Bulletin No. 14E issued in October regarding Rule 14a-8(i)(7), which relates to companies requests to exclude certain shareholder proposals such as CEO succession plans, the two consultants wanted to gauge investors’ views on this topic. “CEO succession planning has become an increasing concern to investors because of its impact on shareholder value,” said Beverly Behan of Board Advisor. “We wanted to understand what investors viewed the greatest risks in this area.”
As for directors’ concerns, the SEC bulletin heightened the call to action for those public companies with inadequate succession planning programs, according to a soon-to-be published Director Notes report written by Edward Ferris, a partner with Hedge Fund Solutions, and Justus O’Brien, co-head of the North American CEO Succession and Board Services Practices of Egon Zehnder International. And for those companies with robust programs, they are more likely contemplating the best way to respond to the inevitable shareholder proposals on the topic.
The report, part of series on the 2010 Proxy Seasons from The Conference Board Governance Center due out in the next two weeks, aims to answer three questions:
- What is the likely impact of this policy reversal?
- How will it practically affect the board?
- What should shareholders know about CEO succession plans, and why?
The authors also surmise that “the most recent SEC guidance fully elevates CEO succession to the status of a core board responsibility, along with audit, governance, executive compensation and other traditional board functions.” [Governance Center members can access all Director Notes reports by clicking here. For more research on succession planning, read The Governance Center’s research report, The Role of the Board in Turbulent Times: Leading the Public Company to Full Recovery, which has a chapter dedicated to the topic. Order a copy by clicking here.]
After interviewing representatives from 20 different organizations from October to January, the study made the following observations (To see the entire study, click here):
- Private equity firms focus on quality of management more than succession planning, but they are concerned about management quality one to two levels below the CEO. (Those included in the study included members of Alliance Bernstein, Brookfield Asset Management, GTCR – Golder Rauner, Edgewater Capital, McNally Capital and Shamrock Capital and Sterling Capital.)
- Institutional investors note that proxy and other disclosure on succession is typically minimal, boilerplate or non-existent. They review the tenure of the senior team – and its turnover – from proxy data but primarily rely on their discussions with board members to form impressions of how effectively the board is addressing succession issues at the company. (Those included in the study included members of Laborers’ International Union of North America (LIUNA) pension fund, CalPERS, and Canada Pension Plan.)
- Analysts – including Moody’s, Standard and Poor’s and Risk Metrics – include succession planning factors in their ratings. Moody’s goes as far as including what it calls a “Key Man Risk” when it is reviewing banks and financial institutions for their bank financial strength ratings. It defines that risk as the degree to which a bank’s key business decisions are dependent upon a single executive or group of executives.
Based on what has transpired among many of the financial institutions, such as CIT Group and Bank of America, the SEC has changed its stance in that October legal bulletin regarding Rule 14a-8(i)(7) and will not so generously allow shareholder proposals regarding CEO succession plans to be excluded from the proxy. (To read the whole legal bulletin, click here.)
“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,” the legal bulletin stated. “As such, we have reviewed our position on CEO succession planning proposals and have determined to modify our treatment of such proposals. Going forward, we will take the view that a company generally may not rely on Rule 14a-8(i)(7) to exclude a proposal that focuses on CEO succession planning.”
The actions of the SEC and mindset of institutional investors, private equity firms and even ratings firms almost makes it mandatory for public companies to seriously consider how they go about their CEO succession plan in the near future.
- Gary Larkin
When you consider the amount of scrutiny that takes place to ensure that physical inventories are reported accurately, an investor’s understanding of the quality of leadership inventory (aka Succession Planning) is highly superficial.
In a recent article, I pointed out some of the pitfalls. Please see http://www.planningforsuccession.com/releases/The%20SEC%20&%20Succession%20Planning.pdf
Directors need to be able to rely on objective third party evaluations to eliminate gaps in succession planning processes and outcomes.