Replacing the CEO in a crisis

When it comes to CEO succession, it isn’t enough to have one backup plan, experts say. In the current economy, it is necessary to plan for the worse and the even worse.

Take the case of camera and medical device manufacturer Olympus, where former CEO Michael Woodford was fired after only two weeks in the top job. The newly hired Woodford unearthed evidence that he alleged proved the company had covered up debt incurred by questionable acquisitions, as well as overpaid for financial consulting related to several deals. The allegations ballooned into a public fray involving seemingly outlandish allegations of racism, financial impropriety and yakuza payoffs.

When Woodford tried to bring the evidence forward, calling for the ouster of then-CEO and chairman Tsuyoshi Kikukawa, it was Woodford who was fired following an emergency board meeting. The company has since lost Kikukawa as chairman after it was revealed that he and other executives were responsible for deferring losses on investment securities and using other funds to cover up those losses. Calls to Olympus for comment were not returned.

Ultimately Olympus had bigger issues than a succession plan, but its crisis highlights the need for companies to have one or more plans in place to replace high-ranking executives should the need arise.

‘The shelf life of CEOs over the past 30 years has gotten shorter and shorter,’ says Joe Griesedieck, vice president of Korn/Ferry International’s Board & CEO Services Practice. ‘That’s why you need two distinct succession plans: one for the interim and one for a longer-term replacement.’

Things can go very badly for a CEO very quickly if he or she cannot contain damaging events almost immediately. ‘In the case of a company crisis or, say, a plane crash, you’re looking for a board to be able to respond with a candidate within 48 hours,’ says Beverly Behan, a consultant who works with more than 100 boards on succession planning. ‘A board can’t just say, We have a bunch of good people, because you may have a situation in which a person you thought you were going to name isn’t the person you can go with.’

That’s certainly what happened with Olympus, which seems to have suffered from rampant fraud among many of its directors and executives. ‘When you have fraud, any emergency succession plan goes out the door, because the whole team goes out the door,’ Behan, pictured right, says. ‘They’re all tainted, and that means you need to go out and find new people.’

Board involvement is key

CEO succession is considered one of the most important jobs for any board of directors, and it consistently ranks among directors’ most important priorities. However, many boards are still dissatisfied with their companies’ plans.

‘Boards are typically pretty poor at getting rid of CEOs,’ says Richard Moran, CEO of Accretive Solutions, who also serves as a board director at several companies. ‘They usually wait too long, and there’s often a mentality that says, He’s our guy, and we’ll stick with him until the company goes down the drain.’

According to a report published in July 2011 by The Conference Board, only about a quarter of companies disclose information on their CEO succession plan processes. Among smaller companies – those with less than $100 million in revenue – that number is far smaller, hovering at about 11 percent, according to the study.

Even more troubling, 16 percent of directors surveyed by The Conference Board say their company is ineffective at succession planning. A similar survey by PricewaterhouseCoopers last year found 30 percent of directors unsatisfied with their company’s succession plan.

It isn’t enough for the board to take on the responsibility alone, though. The corporate secretary and general counsel also play an important part, acting as liaison not only between the outgoing executive and the board, but also between the board and any outside consulting firms, says Griesedieck. Moran agrees, noting that the corporate secretary can be helpful in informing the board about an outgoing CEO’s attitude and whether he or she will ‘ravage the company on the way out’.
 
SEC and investors call for better plans

Large investors have taken these statistics to heart. The Laborers’ International Union of North America (LIUNA), CalPERS and other institutional investors have filed proxy proposals in recent years asking companies to disclose more about their succession plans instead of releasing what is often pure boilerplate.

LIUNA’s most public battle was a few years ago with Bank of America, which had no succinct plan for a replacement CEO following the abrupt resignation of Ken Lewis. Directors at the bank said they were surprised by Lewis’ departure, despite months of shareholder antipathy towards him. The LIUNA proposal at Bank of America was ultimately rejected by the SEC, which has had a policy of categorically denying succession plan proposals.

The SEC changed its position in 2009, however, stating 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.’ While not every proposal that focuses on CEO succession will be granted, the SEC’s new position is certainly more in line with shareholder concerns about voids of leadership eroding shareholder value. Behan says the SEC’s change of opinion was ‘a wake-up call’ to the industry to take succession planning more seriously. Research conducted by Oliver Wyman in cooperation with the National Association of Corporate Directors has come up with 10 best practices for succession planning that can be helpful to most organizations.

Last winter, after Apple’s then-CEO Steve Jobs went on medical leave, LIUNA proposed that the IT giant disclose its succession plan, but Apple – which had already been criticized by investors and even former directors for being too reticent about Jobs’ health – said such a proposal would put the company at a competitive disadvantage. The proposal was rejected by shareholders.

Ultimately the situation at Apple worked out, but not without some investor heartache. In August the company promoted its chief operating officer to CEO, while Jobs took on the role of board chairman until his death in October. A month later, Apple named its co-lead director as the new chairman.

The LIUNA proposal failed at Apple, but don’t expect the group to go away. Jennifer O’Dell, assistant director of corporate affairs at LIUNA, says the union will file identical proposals at 10 companies this coming proxy season, though she won’t specify which companies will be targeted. ‘We’ll look at whether they have had the same CEO for the past 10 years, or a recent transition in the last year,’ O’Dell says, adding that she expects most companies to simply adopt the proposal instead of putting it to a vote.

Boards have adapted to be more responsive to shareholder concerns, says Matteo Tonello, managing director of corporate leadership at The Conference Board. Some companies are even implementing CEO auditions, wherein a candidate is trained through high-level operational assignments.

Keep things in-house if possible

According to The Conference Board, nearly half of all CEO successions are unplanned, and in-house talent is the most effective solution in such cases. One of the most famous examples is McDonald’s, which lost its long-time CEO in 2004 and then his replacement months after ,but was able to act quickly and appoint successors.

‘In an ideal world, you don’t want to go outside unless there is reason for cultural change,’ Griesedieck says.

When Air France-KLM had its hands full dealing with high gas prices, skyrocketing ticket costs and the fallout from a 2008 plane crash, the board reacted decisively by firing CEO Pierre-Henri Gourgeon – who had been given a new four-year contract only months earlier – and bringing back ex-CEO Jean-Cyril Spinetta to regain investor confidence while the board approved the promotion of Alexandre de Juniac as CEO.

The move was well received. Analyst Andrew Lobbenberg called Spinetta ‘a safe pair of hands in a difficult period,’ pointing out the decade of profitability under Spinetta’s reign. According to Behan, Air France did the right thing by bringing in Spinetta while grooming de Juniac. ‘The company had the option to go outside and seek somebody else if it wanted to,’ she says. ‘It was a good backup plan.’

Having an emergency succession plan in place which specifies all criteria that will be used to select the next CEO, and also explains why those criteria are critical to executing the future business plans of the company, can go a long way in calming investor concerns and avoiding the internal unrest that can result from employees feeling that they should have been considered for the job.

It can also add accountability to the CEO’s office, as the CEO will know that there is a viable plan which the board can execute to replace him or her if performance is less than expected. As more companies are willing to shake up leadership, crisis succession plans may also become necessary for other high-ranking executives such as the CFO, general counsel and corporate secretary, especially if those roles are likely candidates to replace the chief executive.