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Are Companies Prepared for Succession Planning?

January 27, 2016

Successful board and CEO succession planning is an integral factor in maintaining long-term stability of companies. Without a strong plan in place, organizations put themselves at risk on many counts. Equilar recently hosted a webinar with Andrea Plotnick, Senior Principal, Board Solutions and Christine Rivers, Vice President, Board Solutions at Hay Group, to discuss the current state of succession planning and key strategies to ensure successful planning processes.

Andrea Plotnick, Ph. D
Senior Principal, Board Solutions
Hay Group

Directors are beginning to get more involved in issues pertaining to shareholder activism, such as Say on Pay and proxy access, and consequently, investors are scrutinizing board succession planning to ensure that company strategy is aligned with shareholder interest. And because the applicability of knowledge and experience are constantly shifting, companies are consistently evaluating and assessing their boards. “Now more than ever boards need to think about their makeup much more strategically,” explained Rivers. “This begs for well-thought out processes and protocols.”

To be prepared for unexpected scenarios, CEO and board succession planning are both ongoing, continuous processes as opposed to a one-time events. When succession is poorly executed or unplanned, organizations will find themselves in unfortunate positions. According to Hay Group, there have been numerous cases where CEOs have prematurely stepped down, a board did not have an adequate succession plan in place, or a new director was not necessarily considered to be relevant for the boards they served. All of these occurrences place a substantial amount of pressure and urgency on organizations to quickly and adequately discover replacements.

Overall, there is a trend towards greater disclosure regarding succession planning, as investors want to see that boards are well equipped. Despite the fact that boards recognize the importance of CEO succession planning, just 19% of S&P 500 companies detailed a CEO succession plan in their 2015 proxy statements, according to Equilar. That does not mean the other companies do not have these plans in place, but it does mean that they are not clearly communicated to shareholders, who want to be sure company strategy is aligned in the right direction with their interests. And as poor as detailed communication around CEO succession planning has been, board succession planning has been even worse. Many board succession plans tend to be reactive, instead of strategic, according to the Hay Group panelists.

Christine Rivers, Ph. D
Vice President, Board Solutions
Hay Group

While board succession planning remains a crucial issue, just 6% of companies in the S&P 500 disclosed skills matrices in their proxy statements for the purpose of building a board. “It’s clear that organizations are not looking at the board as a true competitive advantage,” said Plotnick.

Though each succession scenario is unique, there are three key categories of succession planning: emergency, planned retirement and strategically driven. Emergency planning is a complete and well-discussed process, outlined for sudden, unexpected changes. Planned retirement is more expected and thought-out over a span of time to ensure better grooming and preparation for future candidates. Strategically driven plans tend to be thorough and created as a means to ensure potential candidates have the appropriate skillsets and competencies that are critical to long-term organizational growth. Strategic plans are aimed at providing long-term value and addressing the emotional elements that come with succession planning, such as resistance to change or a tight-knit group of long-serving directors that doesn’t see the need for refreshment or are unlikely to give their peers low ratings.

“Succession planning is about building a ‘fit for purpose’ board, or a board that has the right skills, the right competencies, the right knowledge, and the right composition overall that changes as the strategy changes,” explained Plotnick. “The tough decisions come into play when trying to understand what the organization needs from the board from a requirement perspective and then assessing directors that meet those requirements.”

The topic of board refreshment is unavoidable, particularly for companies with mandatory retirement ages. According to Equilar, 185 companies in the S&P 500 disclosed a mandatory retirement age in their 2014 proxy statements, with 95% of those companies setting an age between 72 and 75. As that mandatory retirement age nears for a particular director, boards will assume the task of finding a replacement.

The data in this article is powered by Equilar’s BoardEdge, which not only includes information on 135,000 directors and executives qualified for board service, but also more than a dozen categories about each board member’s background and leadership experience, but also features a network tool clearly displaying how board members are connected to each other. For more information on BoardEdge, or to request a demo, click here.

For more information on Equilar’s research and data analysis, please contact Dan Marcec, Director of Content & Marketing Communications at Amit Batish, research analyst, contributed to this post.

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