Survey: Companies avoiding CEO succession plan disclosure

Fewer than one in 20 major US companies give their investors detailed information about how they intend to deal with the potentially unexpected and destabilizing exit of their CEO – an issue of concern to shareholders - according to a new report.

Equilar, which released the study, discovered the corporate governance trend – and a similar lack of disclosure about CEO-to-median employee ratios - by analyzing disclosure practices at S&P 500 companies in the areas of shareholder engagement, board governance and succession planning. Equilar helps companies with board recruiting, executive compensation and shareholder engagement issues.

Companies need to ‘prepare for the unexpected’ in regards to CEO succession plans, the authors of the report write. While a CEO’s departure creates challenges for the management team, having a succession plan may boost shareholder confidence and ‘bring a sense of order to uncertain times,’ they add.

Despite that, just 3.3 percent of S&P 500 companies released what the authors of the report call ‘well-disclosed’ plans - meaning that they included discussion of specific details of the plan, such as successor criteria or logistical timelines. While this is up slightly from the 2.3 percent of companies disclosing details two years ago, the authors describe the 3.3 percent figure as ‘very small.’

Although more companies (36.3 percent) included mentions of succession planning in this year’s proxies, most of these simply state that they have a succession plan rather than explain what that plan entails, according to the study.

The authors of the report write that the number of S&P 500 CEO retirements, resignations or terminations has in the past five years increased to the point where there has been more than 10% turnover at the position every year across the index.

Hogan Lovells attorneys writing in the report describe succession planning for boards and executives as a critical area of focus. ‘Bumpy CEO transitions can undermine investor confidence and erode shareholder value,’ they say. ‘Likewise, poorly managed board transitions can create divisive board processes and contribute to communication problems both among board members as well as between the board and management.’  

Shareholders are increasingly holding boards accountable for developing succession plans for executives and boards, and it is often highlighted by proxy advisory firms in their corporate reports, the attorneys add.

‘However, [shareholders] must also understand that strategic, competitive and talent retention issues may take precedent over full transparency,’ says Belen Gomez, director of research and board intelligence services at Equilar. ‘There needs to be sufficient information to ease shareholder anxiety around the issue - that they have a thoughtful plan in place - without compromising the strategic position of the company.’


CEO PAY
According to the report - which compared S&P 500 CEO total compensation as reported in proxy statements and median income from the US Bureau of Labor Statistics - the CEO-to-US-median worker pay ratio widened rapidly from 178:1 in 2009 to 246:1 in 2013, but has grown more slowly thereafter, reaching 248:1 in 2015.

Following the introduction of the Dodd-Frank Act and a general increase in CEO pay scrutiny, the SEC will soon require public companies to disclose their CEO-to-median worker pay ratio, with a new rule taking effect after companies report on their first full fiscal year following January 1, 2017.

The rule is going to require a change in practices at practically every major issuer: Only one S&P 500 company disclosed its CEO-to-median employee pay ratio in 2016, compared to nearly one-third disclosing a discussion of internal pay equity within the executive team, Equilar found.

Attorneys with Hogan Lovells write in the report that, although the future of Dodd-Frank is uncertain, ‘companies still must come to grips with the fact that, absent near term legislative changes, pay ratio is a reality, and companies should proceed with the hard work that will be required to determine the ratio and develop a plan for how best to disclose and explain the ratio.’

This work will be made more difficult by the fact that no two companies are exactly alike, the lawyers add. ‘Companies which do not currently disclose internal pay equity data may consider including these numbers as investors may find this data more informative than the required pay ratio disclosure,’ they say.


OTHER FINDINGS
Among other things, the report found that:

• Roughly 92 percent of S&P 500 companies disclosed a clawback policy in 2016, up more than 20 percentage points since 2012
• About 96 percent of S&P 500 companies discussed pay for performance in their executive compensation programs in 2016, up 9.7 percentage points since 2012
• Disclosure of shareholder engagement more than tripled in proxy statements since 2012, reaching 66.1% of companies in the index this year
• Shareholders at a majority of the companies studied will again vote on the frequency of say on pay votes in 2017. In 2011, more than 90 percent of companies adopted annual say on pay votes, with the remainder almost entirely comprising triennial votes.