Directors May Want to Look at That CEO Succession Plan

As investors continue to take aim at public companies and the federal government is ready to ratchet up regulation in the aftermath of the financial crisis, some directors are wondering about their executive team’s future. And that inevitably leads to the question, “How good is our CEO succession plan?”

In the last two weeks alone, there have been at least three high profile “emergency” cases of CEO transitions. Based on the swift action of one of the companies, it seemed that the other two companies did not have an affirmative answer to the above question. Other than internal politics or unique circumstances, it seems one reason for companies lacking good succession plans in today’s environment is that there is no definitive rule by regulators and only one exchange addresses it.

The New York Stock Exchange listing standards require members to have guidelines for the selection of the CEO, the performance review of the executive and the description of a general roadmap to follow in the event of an emergency (including a sudden departure or need for dismissal and the unexpected death, disability or impediment). NASDAQ does not have any rules regarding succession planning.

When Bruce Wasserstein, chair and CEO of venerable financial advisor and asset manager Lazard Ltd., died Wednesday unexpectedly at age 61, the Board of Directors named Vice Chair Steven J. Golub as interim CEO effective immediately. Golub, 63, has been with the firm since 1984 in various senior leadership positions, including CFO and chair of the company’s financial advisory business. As required by NYSE, Lazard has listed its succession plan in its governance guidelines.

In the other two cases (Bank of America and CIT Group), the circumstances involve resignations: Bank of America’s CEO Ken Lewis on Sept. 30 and CIT Group’s Chair and CEO Jeffrey Peek on Tuesday. Both boards weren’t totally surprised considering that Lewis had already been stripped of his chairmanship five months earlier and large number of directors had already been replaced following a divisive annual meeting and Peek is facing the prospect of seeking bankruptcy court protection. Both boards were given a much shorter timeframe to complete the succession plan than most corporate governance experts advise.

Both are prime examples of how two well-known companies, in this case banks, run by CEOs with visions of staying in their positions for the long-term were caught off-guard because they seem to have no discernible succession plan. Both banks failed to name interim replacements as the sitting CEO helps in the search process.

The Conference Board Governance Center’s Executive Action Report The Role of the Board in Turbulent Times CEO Succession Planning (Aug. 2009), points out the importance of directors immersing themselves in the leadership makeup of their company. “… directors should acquire their own personal knowledge of the talent pool available at various levels within the organization and feel confident about the effectiveness of the leadership development program. Considering that the final decision on issues of succession resides with the board as a whole, each director should be able to contribute to the debate his or her informed opinion about the preparedness of internal candidates.”

As for the Bank of America, not only does the board of the country’s largest bank have to name a successor by Dec. 31 (the date Lewis will officially step down), it faces a jury trial with the SEC over an investigation into the nondisclosure of bonuses paid to Merrill Lynch employees prior to the bank’s purchase of Merrill. In addition, the bank faces a separate probe by New York State Attorney General Andrew Cuomo and a House subcommittee.

At the same time, the investor backlash continues as evidenced by this Oct. 6 post by Beth Young, a senior research associate at The Corporate Library. More and more shareholders have been putting forth proposals that address CEO succession plans and even call for management preparing an annual report on such plans. (See Whole Foods Market no-action letter request to the SEC, Oct. 5, 2009.)

The Bank of America board’s six-person search committee headed by Chair Walter Massey now faces the dilemma of elevating insiders such as Chief Risk Officer Greg Curl or Brian Moynihan or going outside the organization and face the possibility of other executives leaving, according to TheStreet.com.. Massey, who faces a mandatory retirement next year, had been “cooking up” succession plans for himself and Lewis back in April, according to TheDeal.com’s Dealscape column in May.

TheStreet.com reports that in August Lewis placed “a number” of key executives in a position “to compete to succeed me at the appropriate time.”

The bank addresses its succession plan policy in its Corporate Governance Guidelines. Its most recent proxy statement (March 2009) lists “creating a succession plan for the position of Chief Executive Officer and reviewing succession plans for other executive officers and senior management” as the board’s third top responsibility.  Additionally, the proxy states that the lead director has the responsibility of discussing succession planning with the CEO. But, unfortunately the lead director resigned in May following a shareholder campaign to remove him.

At the CIT Group, in a prepared statement Tuesday, the company said it is forming a search committee to oversee the recruitment process and ensure a smooth leadership transition at the company.

“Now is the appropriate time to focus on a transition of leadership, and I look forward to working closely with our board during that process,” Peek said.

Most corporate governance experts would beg to differ. They believe succession planning is not meant to be a one-time “emergency-only” task. It should be part of a company’s strategic plan. In The Role of the Board in Turbulent Times, The Conference Board recommends that corporate directors dedicate full attention to their succession planning duties and use the challenges posed by the economic crisis as an opportunity to improve their companies’ leadership development programs.

The report spells out five steps boards should take as a roadmap to help directors organize succession planning, integrate it with existing board responsibilities, make it transparent both within and outside the company and ultimately define it as an ongoing element of business strategy. Those steps are: assign responsibility to a standing board committee of independent directors, make succession planning continuous and integral to business strategy, integrate succession planning into top-executive compensation policy, integrate succession planning into risk management and make succession planning   transparent and describe it the company’s annual disclosure.

Beverly Behan, principal of Board Advisor LLC, believes Bank of America’s board (which had a huge turnover following the annual meeting in May) should have made succession planning a priority over the past four months. “Any succession conversation in the BofA boardroom should have involved a discussion of an interim replacement in a crisis – and an agreement on who that should be,” Behan wrote in her Oct. 6 column The Boardroom on Businessweek.com.

Instead, what she saw there is what she has seen at many public companies. “When I work with boards on CEO succession planning, I am shocked at how often I find that their emergency plan consists of little more than a list of high-potential internal candidates and a telephone tree of “who calls who” if a crisis breaks,” she wrote.

For what it’s worth, I did find a recent example of one company that completed a planned top executive transition that was not precipitated by an emergency. Blue Cross and Blue Shield of North Carolina announced it has elevated its COO J. Bradley Wilson to be president while its CEO Bob Greczyn stays on eyeing a possible retirement in 2010. The insurer stated the decision was the result of a year-long succession plan carried out by its board.

- Gary Larkin

Posted by Gary Larkin at 11:37 AM | 1 Comment »
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