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November 13, 2012

Emergency Succession Planning: Increasing Expectations for Boards

by Michael W. Peregrine, McDermott Will & Emery LLP and William F. Kanzer, Kanzer Associates, Inc.

Recent marketplace developments serve to encourage governing boards to establish an emergency CEO successor contingency process as part of risk management protocols. Such a process would be in addition to the board’s traditional obligation concerning succession planning. Unexpected “lightning strikes” relating to CEO security are increasingly within the realm of possibility.  They can create havoc for the organization, its brand and its constituents if not properly anticipated. Certainly, the development of an emergency succession plan requires substantial governance effort, is a distraction from the established board agenda and may lead to significant discomfort in the executive suite.  Given what is at stake, however, these disadvantages are more than offset by the ultimate organizational benefits of establishing such a plan.

The general practice of senior management development and succession planning has long been recognized as a fundamental oversight obligation of the governing board.  The duty of care expects that the board will direct and monitor corporate efforts toward the training and advancement of internal senior executive management, as well as the planning for eventual senior executive succession.  Plans for executive development and succession should be periodically reviewed by the board.

“Emergency succession” planning involves a significantly different component of the board’s traditional executive succession planning activity.  It is of paramount importance, whether the company is publicly traded or privately held.  An ad hoc board committee should be established to define the attributes, cultural fit and experiences needed in an emergency succession, keeping in mind the company’s current and future business needs. The emergency succession committee may have discussions with the current CEO (advanced planning: before things might happen), seeking input and collecting perspectives on the “what if” scenarios and “who” would possibly be on the short list of potential CEO succession candidates.  The committee should develop a working document or position specification that clearly defines the core capabilities in the areas of strategy, leadership and execution to be considered as an effective immediate CEO successor.

With the assistance of an executive search firm/ leadership consulting firm and in conjunction with the Board’s input, a short list of three to five CEO-succession ready internal and external candidates should be at hand.  These candidates may not have necessarily been interviewed by the entire Board but should have been initially vetted by the lead director; meet or exceed the written requirement established to be an effective immediate replacement; and have a track record of demonstrated success and profitability to be considered for the CEO role.  Systematic emergency planning should be actively reviewed and the pool of external and internal candidate list revised and continually updated. Often times the Board will have one of its own members who has previous CEO experience designated in advance as an interim CEO until a permanent CEO is found and an orderly transition completed.

As several recent developments suggest, sudden death or health care concerns are not the only justification for emergency succession planning. Emergency succession needs can arise from a wide variety of executive-based controversies.  These include circumstances in which a senior leader is the subject of governmental investigation; is involved in personal behavior inconsistent with corporate values; has materially violated corporate ethical principles; has adopted a controversial public position on political or moral issues contrary to the interests of the corporation; or other, similar matters where the subject conduct or development renders the executive immediately unfit to continue in corporate service, in the judgment of the board. 

Interest in the concept of emergency succession planning was heightened by recent survey results, compiled by Heidrick & Struggles, indicating that almost 40% of US companies represented in the survey have failed to vet an emergency successor, and that at least 25% fail to discuss the issue on a regular basis. An effective emergency succession plan is consistent with effective risk management principles. The risks associated with unplanned events with respect to executive leadership (e.g., executive health, disability, legal or ethical concerns) fit squarely within the board’s ERM portfolio; i.e., to identify and manage potential events that may affect the stability of the enterprise.  An emergency executive succession plan should be perceived as a prophylactic against future disabling enterprise risk.  It is also likely to be well-received as a commitment to effective governance practices generally, and may help the enterprise continue to attract high caliber executive talent. 

So the next time you read in the papers about the sudden and unexpected departure of a CEO or other leading senior executive, ask yourself the question whether the corporation’s board had an emergency succession plan in place.  Because, “these things can—and do—happen.

Michael W. Peregrine, a partner in the law firm of McDermott Will & Emery LLP, advises corporations, officers, and directors on issues related to corporate governance, fiduciary duties and internal investigations. He can be reached at Mperegrine@mwe.com.

William Kanzer is the President/ Owner of Kanzer Associates, Inc., a retained executive search in Chicago, Illinois that coaches clients through today’s challenges and identifies senior C- Suite executives and Board Directors who can create optimum culture to drive commercial success. Kanzer Associates, Inc. works with Fortune 500 companies, small innovative companies as well as not for profit organizations on a national basis.

Topic tags: board of directors, CEO succession planning, corporate governance, lead director duties