Succession Planning Attorney

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. Risk management is a critical aspect of this duty, ensuring that the board identifies potential risks and creates a plan to mitigate them effectively. 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 events 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.

• A 2010 survey by Heidrick & Struggles and the Rock Center for Corporate Governance at Stanford University found that, on average, boards spend only two hours per year on CEO succession planning.
• In a recent Corporate Board Member survey of directors of companies listed on the New York Stock Exchange, 43% said CEO succession was the responsibility for which the board was least effective.
• According to the 2011 Spencer Stuart Board Index, more than 30% of survey respondents reported that their companies have neither an emergency nor a long-term business succession plan in place, and nearly 60% said that their boards lack a written description of the skills and experiences required for the next CEO (see Box, Recent Data on CEO Succession Planning).

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 law firm's goal is to clear up that confusion and make succession planning as easy as it can be.

Competency modeling is a systematic approach to defining the specific skills, knowledge, behaviors, and attributes (SKBAs) required for success in a critical position within an organization. It essentially creates a blueprint for what high performance looks like in leadership positions. Here's how it works:

• Identifying Competencies: The process starts with identifying the key competencies critical for success in a role. This might involve analyzing job descriptions, performance reviews, and conversations with experts in the field.
• Defining Levels: Once core competencies are identified, different levels of proficiency are defined for each. For example, a competency like "communication" might have levels ranging from "clearly conveys information" to "inspires and motivates others through communication."
• Creating a Framework: By combining competencies and their proficiency levels, a competency model is built. This framework serves as a benchmark for evaluating internal talent and identifying potential for future roles.

A good rule of thumb is to review and update your formal succession plan annually. However, it's important to be adaptable and revisit the plan more frequently under certain circumstances. Here are some triggers for an update:

• Strategic Shifts: If your organization undergoes a significant change in strategy, your leadership needs might evolve as well. This necessitates reviewing the succession plan to ensure it aligns with the new direction.

• Leadership Departures: When key leaders leave the company, planned or unplanned, the succession plan needs to be adjusted to address the resulting vacancies.

• Internal Promotions: Promotions within the organization can create new openings or reveal potential successors who have emerged through their performance.

There are a few key metrics that can help gauge the effectiveness of your succession planning program. Here are a couple:

• Promotion Rate of Internal Candidates: Track the percentage of open positions filled by promoting from within. A consistently high internal promotion rate suggests your succession plan is identifying and developing strong talent.

• Employee Engagement with Development Opportunities: Employees who feel their potential is being nurtured through the program are more likely to stay engaged and committed to the organization. Conduct surveys or hold focus groups to understand employee sentiment.

In order to create a successful Succession Plan, the Board or committee will need to consider the needs of the company. The Board or committee will need to determine when it’s time to:

• Retain advisors for assistance

• Consider internal candidates

• Conduct an external search

• Determine that enough information has been obtained to support an informed judgment

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:

• assessing and evaluating candidates regularly and consistently

• involving executives and senior management in both development plans and succession planning

• focusing on individuals' strengths and weaknesses and targeting individuals' assignments based on this information

• reinforcing a culture of leadership development, planning to retain and obtain top talent by individual as well as by position

• providing feedback and opportunities to candidates assessed (APQC, 2001; Best Practices, LLC, 2008; Cohn, Khurana, & Reeves, 2005; Conger & Fulmer, 2003; Fegley, 2006; Groves, 2007, Herman, 2006).

In the event of a CEO transition, having an action 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 in a different 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, ensuring business continuity and asset protection during leadership transitions.

The timeline for succession planning is a long-term proposition, ideally starting well before a planned leadership transition. Here's a breakdown:

• Early Identification: Ideally, potential successors should be identified several years before they might be needed to fill a role. This allows ample time for employee development and ensures a smooth handover when the transition occurs.

• Development and Training: Once potential successors are identified, a targeted career development plan should be created to equip them with the necessary skill sets and experience. This might involve leadership training programs, mentorship opportunities, or project assignments that stretch their abilities.

• Ongoing Monitoring: Potential successors' performance and progress should be monitored regularly as they progress through the development programs. This allows for adjustments to the plan or identification of additional candidates if necessary.

• Exit Strategy: In addition to identifying and developing successors, a comprehensive succession plan should include a well-defined exit strategy for outgoing executives, ensuring a smooth transition and minimizing disruption to the business.

Human resources (HR) plays a pivotal role in the entire succession planning process. Here's a glimpse into their contributions:

• Developing the Framework: HR collaborates with leadership to develop the succession planning framework, including competency models and talent assessment tools.

• Identifying and Assessing Talent: HR helps identify potential successors through various methods, such as performance reviews, development discussions, and assessment tools.

• Developing Training Programs: HR takes the lead in creating and delivering training programs designed to develop the skills and knowledge needed for leadership roles.

• Facilitating Mentorship: HR can play a key role in facilitating mentorship programs that connect high-potential employees with experienced leaders. These mentors can provide guidance, support, and insights that accelerate the development of future leaders.

• Communication and Transparency: HR plays a crucial role in communicating the business succession planning process to employees. This fosters transparency and helps employees understand their development opportunities within the organization.

• Tracking Progress and Maintaining Records: HR is responsible for tracking the progress of potential successors through the development pipeline. This might involve maintaining records of training completed, performance evaluations, and development goals achieved.

By taking a proactive and comprehensive approach to succession planning, HR professionals can ensure a smooth transition of leadership when the time comes. This not only benefits the organization by ensuring continuity and stability but also boosts employee morale by demonstrating the company's commitment to developing the next generation from within its own talent pool.