When communication with the C-suite breaks down, boards must be willing to use annual performance reviews and dock pay to force CEOs to comply
When the board of French pharmaceuticals maker Sanofi fired six-year CEO Chris Viehbacher at a special meeting on October 29 and announced that board chair Serge Weinberg would take over as interim CEO, it was apparent the board had been asleep at the wheel in terms of one of its key duties: succession planning.
It turns out the board had been asking Viehbacher for a succession plan for three years and kept being stonewalled by him, according to an investigative story by Eleanor Bloxham, CEO of the Value Alliance and Corporate Governance Alliance, which Fortune published last week. The lack of transparency from Viehbacher wasn’t limited to a succession plan; he also failed to provide information the board had requested regarding declining revenues for the diabetes drug Lantus, which generates several billions of dollars in sales for Sanofi, according to the report in Fortune.
It's unconscionable for a board to allow such roadblocks to the basic information it needs to fulfill its responsibilities to shareholders to continue for such an extended span of time.
‘Succession planning ultimately is the board’s responsibility: not only to have a succession plan in place but also to revisit it regularly,’ says Melissa Aguilar, a researcher at the Conference Board. ‘If the board was getting pushback from the CEO, it’s still on the board. It’s the board's oversight responsibility. It also needs to demand information from the CEO. If it isn't getting it, it needs to address the issue.’
Peter Gleason, managing director of the National Association of Corporate Directors, agrees that stalling by any C-suite officer on information requested by the board calls for decisive action. The board must ‘not let that continue without a clear-cut explanation of why that information can’t be provided,’ he says. ‘It needs to say to the CEO that there will be consequences if the information is not delivered by X date.’
Those consequences could include noting the communication rift in the board’s annual evaluations of the CEO’s performance. ‘If there’s occasion to put that in the performance review, you can stop incentive compensation,’ Gleason says. ‘If that information is intentionally not being provided to [the board], it can’t do its job to make sure the company remains strong.’
Alternatively, the board could put the CEO on probation, dock his/her pay, or fire him/her. Strangely, Bloxham’s article doesn’t mention any such efforts. Rather, Sanofi’s board resorted to the last option only after Viehbacher ‘dismantled the succession agreement’ he reached with Weinberg in September, which called for him to step down in a smooth leadership transition, as reported in Fortune.
Gleason points out that succession planning should begin right after a new CEO is hired and at minimum should include an emergency succession plan in case something happens to that new CEO. Succession planning should be done with the chief executive’s input and ‘hopefully he or she is grooming [his/her successor] over a long period and that person will have a long period to transition into the role,’ says Aguilar. ‘It’s on the board to make sure it doesn’t lose control of the succession planning process.’
With the board reportedly looking outside the firm for a successor, Sanofi could potentially be faced with the departure of other senior executives hired by Viehbacher, Aguilar warns. ‘Uncertainty about whether the strategy the former CEO put in place is going to continue or about what his or her role could be going forward’ or allegiance to the former CEO could motivate other executives to leave, she says. There have also been rumblings in recent years about passing over internal candidates who thought they might be considered for the top role. But Aguilar adds that none of this should prevent a board from looking outside the firm for a successor.
The bottom line is that boards can’t afford to let a standoff such as the one Sanofi experienced continue for any length of time. ‘The board has a fiduciary duty to make sure it is sustaining the company for the long term,’ says Gleason. ‘You don’t want to violate your fiduciary duties by not taking action on [the CEO's refusal to provide critical information.]’
