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Clawback Provisions and How They Might Impact Your Company
What is a Clawback Provision?
Clawback provisions are clauses that specify a set of factors or situations in which...
However, succession planning is essential to ensure your business continues to run smoothly when a CEO or key manager becomes incapacitated, resigns, or dies.
Succession planning for all key management positions needs to be established. The goal is to have someone in place who is qualified to take over as CEO through the normal course of business or in an emergency situation. This should also be established for any key management position for when or if the need arises.
For each key management position, including the CEO, the CEO's direct reports, and other key positions, the board or committee should establish a succession plan.
Regularly evaluate strengths and weaknesses of the senior executive team and establish plans for individual development designed to prepare these executives to advance.
1. Failing to align on strategy.
2. Over-involving the full board.
3. Conducting internal assessments too late.
4. Creating a "horse race" too early.
5. Neglecting external benchmarking
6. Over-valuating external candidates.
7. Failing to update the plan regularly.
Every Board of Directors has the fiduciary duty to address major business risks, including the loss of a senior executive. The board must act in good faith, with due diligence and in the best interests of the company. “The board’s approach to succession planning and unexpected transitions should be reasonable under the circumstances.”
For every key management position, in addition to the CEO, a plan needs to be in place. What will happen if this person leaves immediately? What will happen if this person leaves in a timeframe that can be expected and planned for? Are there managers in place who are qualified to take over “in a pinch?”
Some Boards may not be engaging in sufficient succession planning that reflects the importance of leadership transitions.
It can be difficult to suggest to an existing CEO that you need to plan for his dismissal, resignation or demise. An existing CEO may fail to see the need for succession planning, or resist the notion that succession planning is critical, even when things are going well. It is important for the Board to keep in mind that succession planning is for all key management positions, not just the CEO. The overall management development approach helps overcome this obstacle.
It is common for “more pressing matters” to postpone succession planning on a Board’s agenda. The Board and involved employees need to understand that succession planning is a most critical component of keeping your business healthy.
The Board of Directors may not understand exactly what effective succession planning is, and may avoid it because of the confusion. Our goal is to clear up that confusion and make succession planning as easy as it can be.
A major component of succession planning is management development. A culture of leadership development needs to be established and reinforced.
Best-practice succession planning procedures include:
In the event of a CEO transition, having a plan in place assists the Board in taking appropriate action.
An independent director should be chosen to organize special executive sessions to discuss issues related to succession and should have the ability to contact all independent directors in an emergency fashion. Outside counsel should be retained to assist with employment law questions as well as SEC reporting and corporate governance.
Public relations and investor relations may also need to be taken into consideration.
If there are no qualified internal candidates prepared to take over the role, a search firm may also need to be retained to locate a qualified external candidate.
There could be a time when requesting a resignation from the CEO is the right move to make. There are numerous factors to be considered before making such a request.
A. The Board needs to determine that a majority of the directors is interested in removing the CEO in an expedited fashion.
B. A confidential executive session may be called for independent and non-management directors to discuss options without the CEO present. During this private executive session, the formal decision to replace the CEO will not be made. The directors will consider whether to pursue the resignation of the CEO; potential successor(s) (either interim or permanent); potential successor(s) for the internal candidate selected; how to manage the potential impacts on critical relationships and agreements of the transition to a new CEO; and when general counsel should be information of the consideration of replacing the CEO.
C. Outside counsel should review by-laws and corporate laws, as well as any employment agreement with the CEO concerning his director role.
D. Once the independent and non-management directors agree to seek the CEO’s resignation, typically one or two of the directors will meet with the CEO and discuss the possible terms for his resignation. If a termination for cause is a possibility, a discussion is typically had within the Board as to whether it would benefit the company to accept a resignation rather than go through the potential scandal of a termination for cause. During this discussion, the Directors need to make it clear that they are not negotiating whether or not there will be a resignation, just the terms of that resignation. It is not in the best interest of the company to allow the CEO to think he has “wiggle room” and could convince any Director(s) to change their minds. The Directors need to provide a clear picture as to what the terms of the resignation will look like.
E. Once the CEO has agreed to resign or it has become evident that he will not agree, the Board of Directors must hold a formally noticed meeting, for which the CEO is entitled to notice. If the CEO attends the meeting, the Board can seek his recusal or pass a resolution that the decision be delegated to the independent and non-managing directors and a private executive session can be called at a later time and/or difference place.
F. Next, the board will hold a meeting to appoint a successor or interim CEO.
While succession planning is sometimes a challenge, it is one of the most important tasks a Board must address. It is important to remember that succession planning does not apply only to the CEO, but to all key management/senior executive positions as well as the Board itself. Management development is key. The end goal is to be prepared for any anticipated or unforeseen vacation of a key position in your company.
Joe Whitcomb is the founder and president of Whitcomb Selinsky, PC. In addition, he manages the firm and heads up the Government Procurement and International Business Transactions practice areas.
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