Turbulent Times Highlight the Need for Succession Planning

How much risk is your company willing to take? If your organization does not have an actionable and cost-effective CEO succession plan in place, then its willingness to gamble is high.

Research shows that faulty integration of senior executives can cost a company 10 to 20 times the executive’s salary in lost opportunity costs. Moreover, public mistrust in managing transitions can generate a loss of productivity and social costs valued at nearly $14 billion per year. place.

According to “The Role of the Board in Turbulent Times: CEO Succession Planning”—a recent report released by The Conference Board—creating a board committee dedicated solely to succession planning duties is the first critical step in a five-step roadmap to ensuring the success of a company during times of high-level executive change.

Estimates for 2008 indicate that, in the United States, CEOs from more than 1,400 public companies left their positions. Many of them were sudden and unforeseen departures.

“Of course, some sectors were affected more than others,” says Matteo Tonnello, associate director of corporate governance at The Conference Board and co-author of the report along with John C. Wilcox and June Eichbaum. “The financial services industry was affected because of the heightened public scrutiny of the last year and the many banks around the country that became the target of government interventions. But this surge in CEO turnover remains a generalized phenomenon, and all corporate boards should take notice.”

Although CEO succession planning is not federally regulated in the United States, the topic seems to be moving toward more regulatory oversight. Currently, the listing standards by the New York Stock Exchange, section 303A.09, require boards to explicitly address a CEO succession plan in their corporate governance guidelines. In addition, a bulletin issued by the SEC Division of Corporate Finance on October 27, 2009, regarding rule 14a-8(i) (7) states that in light of recent events, “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.”

Having a well-defined CEO succession plan is more necessary than ever. The Conference Board report suggests that along with assigning a board committee of independent directors, a corporation also must make succession planning continuous and integral to business strategy and corporate culture; integrated with a top-executive compensation policy as well as risk manage ment strategies; and transparent both internally and externally.

By Eileen McKeown

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