Planning for who will be an organization’s next leader is one of the most important tasks facing a board of directors. Those not well-prepared for such turnover can experience more than just unprofitable and financially rocky times for their businesses.
Since business continuity plans are mandated by some regulators and expected by some others, CEO succession planning must be an integral component of that iterative process.
To start, let’s consider that more than half of board members in a recent survey say they need to improve their CEO succession planning.
And let’s think about recent developments, such as the fact that several “boomerang” CEOs have reappeared at the helm of their firms after departing years before, and how one major US corporation is taking a full three years to find the right CEO. And then let us consider some best practices that we likely already know, but might not have thought about ever or recently.
Compliance and risk
Even if not squarely in their wheelhouse, the topic is at least pertinent to compliance and risk professionals, because the task, done poorly or too late (or both) can do more than threaten shareholder value.
It can disrupt business continuity; create unnecessary business, operational, and reputational risks; and create a culture of distrust.
The Sarbanes-Oxley Act of 2002 prompted boards to begin to talk more seriously about succession planning.
But then, in October 2009, in the wake of the financial crisis, the Securities and Exchange Commission’s (SEC’s) Division of Corporate Finance released guidance, encouraging companies to rethink their policies.
In the bulletin, the SEC said it would support shareholder proposals that seek to compel their boards to adopt and disclose written and detailed CEO succession planning policies with specified features, including the criteria for the CEO position, identifying and developing internal candidates, and creating a formal assessment process to evaluate candidates.
“We now recognize 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.”
SEC
In throwing its support behind such shareholder proposals, the SEC said of its own thinking on the matter in its bulletin: “We now recognize 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.”
FINRA mandates the businesses it regulates to have business continuity plans, and it advises member firms in an investor bulletin to have succession plans for their registered representatives, so customer accounts can be reallocated and customers treated with due care.
FINRA also notes in its investor bulletin that additional steps that may be necessary for succession planning for key staff, such as the CEO, CFO and staff requiring certain registrations.
It asks: If your firm plans to hire new staff for these roles, have you considered the extended timelines that may be required for this process and designated current staff that would temporarily serve in these roles?
Other US regulatory agencies (such as the National Credit Union Administration) and powerful financial industry players such as the New York Stock Exchange have rules and emphasize the importance of CEO succession planning as well.
The boomerang
It’s one thing to be able to claim you have some sort of succession plan, but it’s another one to be able to articulate a plan that assuages investors, clients, employees and other stakeholders.
And it’s still a greater challenge to have a planning process that truly accounts for all the complexities and subtleties of who the best leader for the company is at this specific juncture.
Enter the boomerang – the returning CEO who did well the first time, certainly has experience at and knowledge of the business, and can capitalize on the fact that everyone enjoys a good comeback story.
Bob Iger at Disney and Howard Schultz at Starbucks came back to their businesses as returning CEOs recently, and Michael Dell at Dell in 2007 rejoined his eponymous personal-computing business and is still around.
Jack Dorsey at Twitter was a co-founder and CEO and was fired in 2006, took back the reins in 2015, and stepped down last year because of his competing involvement in running the digital-payments company Square Inc.
The returning CEO needs to have the same attributes of any good candidate, regardless of how well he or she knows the business and the c-suite leadership team.
Perhaps most notably, UBS just rehired Sergio Ermotti as CEO to steer its massive takeover of Credit Suisse, which surprised many people, but seems to be a decision to take advantage of the Swiss banker’s experience rebuilding the bank after the global financial crisis. And it was possibly a chance to capitalize on him being Swiss – or, as one commentator phrased it, being “a Swiss solution” to the uncertainties facing the country and the challenge of rebuilding trust in Switzerland’s banking sector.
Since 2010, 22 CEOs at S&P 500 companies have left their leadership roles only to return later, according to analysis by the executive search and leadership advisory firm Spencer Stuart. Of the 22 CEOs, 13 came back permanently and nine were appointed on an interim basis, according to their study, with the interim executives staying less than one year.
The boomerang effect might showcase a well-thought-through decision to bring in a known quantity when a crisis hits – such as a public scandal affecting the whole business or a steep drop in profits – or a decidedly uncreative decision that signals board lethargy and a failure of CEO succession planning.
Regardless of the answer, the returning CEO needs to have the same attributes of any good candidate, regardless of how well he or she knows the business and the c-suite leadership team.
The returning CEO needs to be as well-versed in the technological, operational, and cultural shifts the business has had to make in intervening years. Without taking those shifts into account, businesses are actually not going with the safest bet and candidate.
Additionally, for those institutions that have articulated strong pledges to recruit more diverse persons to leadership roles, bringing back former CEOs can entrench white men in these roles for an even longer duration, calling into question the seriousness of those commitments.
Walmart takes it slow
Walmart chief Doug McMillon plans to stay the CEO of the largest retailer in the United States for at least three more years while his company works on finding a suitable successor to him. He got the CEO role in 2014 and has climbed the ladder since unloading trucks for the company as a teenager, working as CEO of Sam’s Club and Walmart International more recently.
The Walton family is Walmart’s biggest shareholder with about 47% of the stock, according to a 2022 proxy filing, and the family holds three board seats, including the chair role. The family will obviously have a large say in the CEO succession selection process.
The reasons for the conservative approach to finding a successor to McMillon are likely the huge role a mammoth company like Walmart plays in the market – and the outsized media attention it gets for its size.
Also, during the pandemic, the company exploded with growth, benefiting from a mix of having the staples people needed when supplies were low at their grocery stores, plus being a place where items are discounted, as inflation hit consumers’ pocketbooks. No one at the retailer wants to see that growth jeopardized.
Best practices
There are a number of outside consulting groups well-poised to assist companies with the CEO succession-planning process. And they are likely to emphasize themes that are understood but not always put into practice before circumstances go south.
They include starting now and deciding what skills, experience, and personal traits are needed for the business, and updating that description on a continual basis.
The board has a duty to protect shareholder value, and keeping this in mind, the group should not let any one person have an outsized role in the selection and decision-making process, including current CEOs handpicking their successors.
If the CEO succession process includes managing a crisis for the business, the tried-and-true aspects of crisis management apply, such that everyone has a certain role to play in it.
Regardless of which committee is given the task of leading the planning – whether an established or an ad hoc one – roles must be clearly defined and benchmarks articulated.
Dabble in the detail
Details must be understood by everyone involved – from the timeline expected to exactly how candidates will be vetted. Like a business continuity plan, the plan should be revisited and updated yearly.
Leaders within the company should be among those considered for the job, of course, as they are a great source of emerging talent and experience. This pipeline involves aspects of mentoring, sponsorship, and giving the right candidates the exposure and responsibility necessary to be able to evaluate their performance.
It also involves having a well-thought-out plan to fill the hole left by the internal candidate who the board elevates.
There also has to be a well-crafted communication effort on the part of the organization, so shareholders, customers, employees, and the public understand the process that was undertaken and why a candidate was chosen, lending clarity, transparency, and ownership to such important decision-making.