CEO Succession: Takeaways

Background

Dayton Ogden of Spencer Stuart along with Board Leaders members Willow Shire and Russ Planitzer provided perspectives on effective CEO succession planning.

Most CEO transitions are based on an orderly long-term plan. In these situations, history has shown that internal candidates are the most successful.  In crises, however, the results are reversed, and outside candidates achieve better results. Most likely this is due to disruptive but positive change taking place and beneficial creative thinking.

The Boards of Directors should ensure that:

1. There is a plan in place that provides continuous assessment of internal CEO candidates. This should include identifying their professional development needs.
2. Senior HR executives should be intimately involved in designing and implementing the plan reporting to the CEO but also directly to the board on this issue.
3. The CEO in most cases should be key contributor to the plan but can not be allowed to bring forth a single candidate or favorite son.
4. An ongoing group of the board focusing on this responsibility can be a Committee of Chairs or the Governance/Nominating and Compensation Committee.
5. It is critical that the transition committee look forward ascertaining the future needs and strategic goals of the company in assessing the capabilities of candidates.

Other Considerations

1. Maintaining a list of potential external candidates and their skill set can be a valuable asset.
2. A third party search firm involved on an ongoing basis can be a contributor to this effort.
3. As part of the transition plan the board should have a crisis component which should include designated leadership to manage the crisis is well as designated leadership to manage ongoing corporate operations.
4. Boards should consider board members who are qualified based on their backgrounds to serve as interim CEOs.
5. While the competitive horse race structure for replacing the CEO can be successful there was little support for this arrangement and most felt that this can  be disruptive.
6. The office of COO transitioning to CEO was generally seen as yielding mediocre results at best.
7. Smaller companies have difficulty maintaining a high level of bench strength but are still advised to have a formal program in place.
8. In these smaller companies the burden falls to the CEO or perhaps lead director to  test and develop senior executives with special projects

Mergers & Acquisitions: Lessons Learned

The members of our director education affiliate Board Leaders recently held a breakfast meeting discussing M&A. The following are guidelines regarding how to respond when approached with a request from a major shareholder or interested third party.

A 10 MINUTE READ, well worth retaining.

IN THE BEGINNING

• Stay close to major shareholders and understand their issues.  Be forthright and open to discussing diversification of their shareholdings.

• Provide access to the Board.  Consider having a representative of the major shareholder on the Board.  Developing trust early on is key to handling difficult issues that can (and are likely to) arise in the future.

• Recognize that any “deal” or “bump in the road’ is going to be very time consuming for the lead director.  Consider compensating the lead director from the beginning as an “insurance policy,” or providing “fair compensation” when such occasions arise.  It is impossible to deal with this once the action commences let alone when it concludes.

PHASE 1 (After demand is made.)

• Line up best advisors quickly (some may have conflicts).  PR firm is important – even if you never use it.  Be prepared for leaks and how to respond.  Have possible press releases drafted.

• If the Board is willing to commit the time, work with the entire Board as opposed to a Special Committee.  More inputs are valuable as well as resulting in more buy-in to the process.  (Given likely scheduling issues – especially on short notice, to make it work, there will need to be at least 2 calls to include all directors, with the CEO and or lead director chairing the calls.)  Ultimately, having full Board involvement/consensus improves speed to respond.

• With any major shareholder, stress the need for confidentiality.  It is not advantageous to any party to have to negotiate under the glare of publicity.  Also, stress the responsibility that the Board has to all shareholders, not just the major shareholder.

• Spend a lot of time considering all options.   This is a deliberative process.  Gaining consensus is important.  Getting multiple offers when the time comes is very important to maximizing value to the shareholders.

• In deciding to accept an offer, speed to close is critical.  There is a high risk of losing customers to competitors who will seize upon this moment, as well as losing employees, especially those who feel they will not survive any merger, e.g. key corporate finance people, other support and operating functions.

• Have few outs.  Define the agreements with all appropriate considerations, i.e. MAE clauses, walk away fees, other offers, time to close, and ticking fees.  The longer a deal goes on, the greater the risk that it will fall through, at which point the company is effectively on the auction block with much diminished value.  Any contingency fees are unlikely to compensate for the true damage.

• Continue to spend real time with major shareholders.  You never know them well enough.

• Understand that shareholders may/will change during the process from employees and institutions to hedge funds and speculators.

• Define the media policy early on. Who will speak, when, and who reviews content.

• Have the Team on an ongoing basis review any potential “whoops factors.” No surprises.

• Minimize the number of management people who know about and are involved in evaluating/responding to various deal options.  This minimizes leaks.  The Company still needs to have really good day-to-day management running the operation.

PHASE 2 (After the deal is approved.)

• Err on the side of less communication to the press – even after the deal is in the public domain.   Lower the profile so critical work can get done.  Minimize chances of miscommunication and elevating anxieties of employees, customers, and shareholders.

• Be transparent with employees, recognizing that, for some, there will be layoffs.

• Work with the acquirer on the PMI process (post-merger integration) to ensure speediness of transition and ultimate success.

• Regularly talk with the acquirer regarding:  status of regulatory approvals and financial arrangements, particularly contingency plans and creation of a financial cushion, should capital markets deteriorate before consummation of deal.   Get to know the acquirer and develop good relations between key players, e.g., the CEOs, chief counsels, and/or CFOs.  Be proactive to help the progress of the deal.

PHASE 3 (When the deal is in jeopardy.)

• Move quickly and decisively to get a deal that works for all parties.  It is in no one’s best interests for a deal to fail.  But be prepared to sue for non-performance.

• Remember that the shareholder base has undoubtedly changed, which severely limits certain options. 

• Consider using advisors for potentially negative communications to maintain flexibility and to preserve a good relationship between CEOs.

• Consider utilizing selective directors at key “negotiating” top-to-top sessions which may enhance the level of confidence and provide perspective.

• When difficulties are resolved, move to close the deal quickly and get the PMI process back on track.