For the first time, CEO succession is at the front of investors' minds as concern grows over planning for the future
Canadian corporate secretaries, just like their US cohorts, must juggle a wide range of concerns on behalf of their company and its board, and few can be more vexing than assuring CEO succession. Increasingly, however, they are seeing change as board members, rather than secretaries, raise the topic.
‘It is part of the evolution of companies, and interest in it has increased as we emerge from this recession,’ says Carol Hansell, one of Canada’s leading experts on the subject and a partner at Davies Ward Phillips & Vineberg. Board makeup has been changing in recent years, such that members of a board are more likely to be active in other corporations where they have encountered the issue of CEO succession, and are therefore more likely to know it must be dealt with. Whether they are fully prepared to do so is another matter, however.
Delicate matters
Raising the topic of succession was pretty much unheard of in most boardrooms a couple of decades ago. It was especially difficult when the CEO was a founder of the firm or there were special-interest blocks owning substantial parts of the organization, says Hansell. As a result, the task often fell to corporate secretaries to get the issue on the board’s agenda. That has now changed, not least as a result of institutions, professional groups and public commissions suggesting what the mandates for directors should be. And while this is still a delicate subject, it can be more easily raised as a matter of good governance growing from the board’s need to oversee compensation, which links directly to succession.
Moreover, today’s board members are attuned to the issue. A series of high-profile CEO departures without a clear replacement have made the headlines, from the board scramble when Bank of America’s (BofA) Ken Lewis quit abruptly to the more orderly Canadian incident when the chair of Rogers Communications had to step in after illness put company founder Ted Rogers in hospital.
The latter is a good example of a ready solution that, while temporary, was planned through regular board consideration of the risks that needed to be covered in order to ensure strong management at all times, says Dirk Schlimm. An adviser on corporate transition and change management and frequent writer for the Canadian Society of Corporate Secretaries, Schlimm observes that corporate secretaries are uniquely situated to ensure the subject of succession receives regular attention. As they are often charged with looking after the board’s needs, they have the ability to ensure certain governance concerns are reviewed regularly.
‘Board members increasingly accept that succession planning is the most important thing they do,’ asserts Hansell. ‘Whether abrupt executive departure comes about as a result of lack of performance, attraction to a better offer elsewhere or another event, dealing with succession is about the most pressure the board can feel.’
Looking at the issue from the shareholder point of view, Ilana Singer, associate director of the Canadian Foundation for Advancement of Investor Rights (FAIR), says, ‘This is a subject every company must deal with.’ While FAIR has not put forth a specific agenda for greater attention to succession, ‘there is no question that it must be handled to protect investors’ interest in the continuity of strong management at the corporations in which they hold shares,’ she adds.
A considerably more activist position has been taken by the Laborers’ International Union of North America (LIUNA). When the BofA problem made the headlines, the union moved quickly, and for the 2010 proxy season it has filed proposals to highlight succession plans at a dozen top companies, including BofA, Whole Foods and American Express.
Richard Metcalf, LIUNA’s director of corporate affairs, recently told Board Advisor CEO and Business Week columnist Beverly Behan that the labor group looks closely at boards through this lens. ‘The rigor of a board’s succession-planning process provides an important window into how effectively that board is governing,’ Metcalf declared. ‘One of the board committees should have primary responsibility to oversee succession planning.’ He added that the larger boards should look at it at least once a year.
Making the best of things
That the boards of today are more prepared to deal with succession than those of a few years ago is clear to Hansell. ‘Most directors have gone through it,’ she says. What constitutes best practice often depends on who you ask, however.
‘As far as I know, there is no such list,’ she says, although she notes that the concept is well embedded. Canadian regulators require succession to be addressed, the SEC has recently written about it, and the NYSE tells its listed firms they must deal with it. The Canadian Institute of Chartered Accountants (CICA), among others, has also weighed in: a 40-page pamphlet entitled ‘Twenty questions directors should ask about CEO succession’ is now available on CICA’s website.
Behan, who consults with companies all over the world, is well aware of the lack of any set criteria for succession. She feels too much of boards’ preparation is about their gut feeling for who can succeed, as opposed to a real analysis of needs and capabilities. ‘To truly align CEO succession plans to needs, you must look at three things,’ she says. ‘One: the business plan; two: corporate strategy; and three: future concerns such as whether the person is to maintain what we do today or will need to be able to handle a new set of issues.’ As to differences between Canada and the US, Behan says it mainly comes down to the fact that in Canada there is normally a division of the chairman’s position from the CEO’s. As a result, the departing CEO in a smooth transition moves to be chairman and may work alongside the new CEO to some degree.
There is plenty to be done, Behan adds, quoting statistics generated by the National Association of Cor porat e Directors in Washington that show 90 percent of directors recently surveyed feel CEO succession is critical, but only 15.7 percent of them feel their company is dealing with the issue adequately.
Having worked with more than 80 boards on CEO succession and other board concerns, Behan emphasizes the value that can be attained by having candidates for succession build some external board experience. She states that this is extremely important because it forces the candidate to think about governance rather than operational matters.
This view was echoed last year by Arrow Electronics chair Bill Mitchell in an interview with Behan. ‘Serving as a board member is invaluable experience for any CEO,’ Mitchell said. ‘It gives you exposure to all of the machinery of how a board really works – including committees and executive sessions – and this is something most company executives, particularly those who run business units, never get.’
