PJ Neal

Thoughts from a more-than-occasional writer

CEO Succession Plans in a Crisis Era [Harvard Law School Forum on Corporate Governance]

CEO succession planning is one of the most important responsibilities of a corporate board, and one of the most challenging. In the best of circumstances, directors are working thoughtfully to anticipate the future, develop potential successor candidates over several years, and to ultimately have one of them step into the top spot. In emergencies or other unexpected circumstances, there is a great sense of uncertainty as to whether the board is selecting the best leader, or just the best leader available right now. It is an expensive question to answer. By one estimate, replacing an ill-chosen or short-tenured CEO leads to a loss of $1.7 billion in shareholder value in addition to a loss of organizational confidence and momentum.

According to forthcoming research from Russell Reynolds Associates and The Conference Board, more than 60 percent of directors surveyed stated that their board had not reviewed or updated the succession plan for the CEO and other key executives in light of the health risks posed by the COVID-19 crisis. The sector with the highest share of corporate boards that did review the CEO succession plan is Consumer Staples (25 percent of all respondents in this sector), while the sector with the lowest share is Materials (11.1 percent). Interestingly, the largest companies were by far those with the highest shares of cases where the board of directors did not review the CEO succession plan (70.3 percent of those with annual revenue of $10 billion and over and 80 percent of those in the Financials and Real Estates sectors with asset value exceeding $100 billion).

While there are many matters competing for the board’s attention right now, it is highly advisable that CEO succession planning be high on the board’s agenda, even if the incumbent CEO is in good standing. The risk of an unanticipated CEO transition is heightened right now due to the exceptional challenge of leading in this time, the emergence of new expectations and requirements for the organization, the increased stress all leaders are experiencing, and health risks from the virus. And, given rapidly changing market and competitive dynamics, it is highly likely that a company’s existing succession plan may no longer put forth the best person for the job, given that the specification was written during better times, and the future looks to be increasingly dynamic and difficult.

These are the six questions boards should be asking:

I had the pleasure of assisting Rusty O’Kelley, Margot McShane, and Justus O’Brien on this article, which was published by the Harvard Law School Forum on Corporate Governance.