Succession planning for senior management should be an annual process, managed by the board. Our panel discusses best practices, including how to develop multiple and next-level candidates, how to keep internal candidates incentivized, and how appointing an executive chairman for a fixed term can help a new CEO transition into the role.
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“There’s certainly an argument to be made, that the moment you name a new CEO, then you ought to be starting to think about who the next person is,” says Blair Jones.
In this episode of the Informed Board podcast, our host, Skadden M&A partner Ann Beth Stebbins, is joined by guests, Blair Jones, a managing director at Semler Brossy Consulting Group LLC, and Erica Schohn, partner and head of the Executive Compensation and Benefits Practice at Skadden, to explore best practices in CEO succession planning. They highlight the importance of preparedness, noting that a well-conceived succession program should serve as a contingency plan for unforeseen events, as well as for orderly retirement of a CEO.
The trio emphasize that succession planning should be an annual event, allowing for adjustments as business strategy evolves. They also discuss the necessity of having multiple candidates and keeping them incentivized, including those not selected for the CEO position. A key issue is the current CEO’s role in succession planning. Typically, the CEO will be involved, but ultimately it falls to the board to make the final decision.
The guests also highlight emerging trends in succession planning, including the use of external assessments, the role executive chairs and the development of next-level candidates. They conclude that, while companies lean toward internal candidates during planned successions, external candidates are more likely to be considered in the case of unexpected transitions or shifts in business strategy.
Voiceover (00:00):
From Skadden, you’re listening to The Informed Board, a podcast for directors facing the rapidly evolving challenges of a global market, a compliment to our newsletter for directors. Our aim with this podcast is to help flag potential problems that may not be fully appreciated, explain trends, share our observations, and give directors practical guidance without a lot of legal jargon. Join Skadden partners, who draw on years of frontline experience inside boardrooms, to explore the complex issues facing directors today.
Ann Beth Stebbins (00:34):
Do most companies have a robust CEO succession plan in place, and what are the best practices for succession planning? What should directors be focused on, in determining whether a succession plan is adequate? I’m Ann Beth Stebbins, a partner in Skadden’s M&A group. Joining me today on The Informed Board Podcast to discuss these topics is Blair Jones, a managing director at Semler Brossy. Blair advises boards on executive transitions. I’m also joined by Erica Schohn, the head of Executive Compensation and Benefits Practice here at Skadden. Erica has more than two decades of experience in executive employment and severance matters. Welcome Blair and Erica to The Informed Board, and thank you for being with us.
Erica Schohn (01:15):
Thank you for having us.
Ann Beth Stebbins (01:17):
Let me open the conversation with a level-setting question. Blair, do most public companies have a well-developed succession plan in place?
Blair Jones (01:24):
Most companies do have some sort of succession plan in place. The question is, how robust is it when the rubber hits the road? If someone has to leave quickly, do you have the bench that you need, to bring the next CEO into place?
Ann Beth Stebbins (01:39):
The way that I think about it, a succession plan should be a contingency plan for unexpected events as well as planning for the expected, orderly retirement of a CEO. Erica, how do you think about those two objectives of a succession plan?
Erica Schohn (01:54):
The processes can look very different in those two cases. One way we think about it is comparing a CEO search versus a CEO succession. Every company, as Blair noted, should have some type of succession plan in place for the more orderly transition. That said, the best laid plans can go awry. Should something happen on a more emergency basis, that succession plan may not be ready. It’s more likely looking at external candidates where, for a CEO succession plan, it usually involves bringing up someone internally.
Blair Jones (02:31):
One of the most important discussions a committee can have, is having an emergency succession plan. So what happens if a CEO falls ill or even unfortunately dies while serving as CEO? And that emergency succession plans allows the board to pivot quickly with an interim successor and spells out not only who the person is, but all of the governance things that need to happen to at least put somebody in place while they figure out whether they can build the interim, ultimately to their permanent CEO. And that may mean deciding that responsibilities need to be delegated to other executives as well. It’s really important to play out that ‘what if’ scenario and know what would happen if the proverbial, being hit by a bus, happens.
Ann Beth Stebbins (03:22):
Are boards doing that on a frequent basis? Are they running through those scenarios and have those emergency plans in place?
Blair Jones (03:29):
It’s definitely a best practice, and they should be doing it annually. While you’re just putting somebody in for the interim, depending on what needs to happen at the company, the person who’s right for the emergency may be different, so if the company’s running well, and you just need somebody to keep the wheels on the bus while you go through your process of what the next steps are, then everything’s fine and good. But there are points in time where it could be very difficult to have somebody who’s just a wheels-on-the-bus person and you need somebody who can rally the troops to move the organization forward in a meaningful way, and that might be a different individual.
Ann Beth Stebbins (04:06):
Is it always a single person? Would a succession plan, particularly in this emergency scenario, ever be a combination of people? Would it ever be someone who’s not an executive at the company, maybe a board member?
Blair Jones (04:18):
Often a board member does step in on an interim basis, someone who’s been a CEO before, or someone who knows the industry quite well, and can indeed keep the wheels on the bus. It could be another executive, but what if two executives were flying together and you had an unfortunate event on that plane? It’s one of the most important discussions that a committee can have, because you really need to game out how different scenarios might happen, and what you would do in each of those cases.
Ann Beth Stebbins (04:47):
How often do you see the interim CEO in this unforeseen circumstance, becoming the CEO?
Erica Schohn (04:56):
If it’s an outside board member who comes in and takes over the role, more often than not, that is on a temporary basis. They’re typically people who have served as a CEO in the past and have reached a point in their career where they’re not looking to do this indefinitely on a full-time basis. They may come in while either the outside search is going on or while they’re trying to get someone in place internally.
Where the interim CEO is the CFO or some other senior executive at the company, there, it’s probably more common for that person to eventually convert to the permanent CEO. They want to give that person a trial run in that role. Maybe they think initially that that person isn’t the right fit for a full-time position, but the person gets in the role and really steps up, and when they’re looking at external candidates, they realize there’s no one better than the person who’s already there at the company, and so that role then converts. I have definitely seen that.
Blair Jones (05:57):
You can have a CFO be a good interim person because they know the investor community, and managing the investor community during this time is really, really important. Similarly, sometimes the chief legal officer will serve in that interim role. It does give the committee and the board the time to observe this person in role to determine if they want them to be the permanent successor.
Ann Beth Stebbins (06:18):
If you do have your plan in place for orderly succession on the retirement of the CEO, and the candidates are developing and ready to step up, that’s a completely different scenario than someone just stepping in to be a caretaker until a CEO can be identified.
Blair Jones (06:36):
That’s why this scenario planning is really, really important, because different candidates could be better people to put into that emergency role at any given time.
Ann Beth Stebbins (06:46):
Candidates may change because the business may need a different skillset as the business evolves. Candidates might develop at a different pace. That was a key feature that you identified, Blair, of having frequent review of the succession plan, so that in the event of an unexpected event, the directors are well aware of the lay of the land.
Blair Jones (07:11):
Right. It has to be at least an annual event, and it needs to be a real roll-up-your-sleeves session, where you’re thinking about the business strategy and how it’s evolving. Boards have to be willing to move away from a prior lean, if they see the business going in a different direction. Particularly now with AI coming into prominence and all of the geographic changes that we’ve had, all of a sudden, different types of candidates may be more appropriate than somebody who might’ve come through the traditional path, and those are important discussions for the boards to discuss and to think about the trade-offs of the different candidates.
Ann Beth Stebbins (07:55):
Do you typically see these discussions at a committee level, full board level? How do different boards tackle succession planning?
Erica Schohn (08:06):
Boards follow what their traditional approach is. Different boards want more or less people involved in these discussions, based on historical relationships. One thing that’s key is to make sure to check the charter. Often, the charters of the board or one of the specific committees like nom/gov or compensation committee will have picked up specifically the succession planning task. Ultimately, it would be in the best interest of the company that if the discussions are had at the committee level, to periodically report into the board on the progress that’s been made, and the current plan.
Blair Jones (08:43):
The advantage of starting with a committee is that they can really be a working team, with the management team as appropriate, to think through the issues and then elevate once certain things have been vetted, to the board.
Ann Beth Stebbins (08:56):
Do you see committees or full boards using outside consultants to assist them in this process?
Erica Schohn (09:03):
Consultants like Blair can be involved in the process, so compensation consultants. There are search consultants that can be hired. But there really is no substitute for the people on the board to have these discussions and do this work. The outside consultant can certainly give you guidance on different things to consider, but the board members are going to be the key players in the process.
Ann Beth Stebbins (09:28):
When should a board or committee start planning for an orderly succession? How many years before the anticipated retirement of the CEO?
Blair Jones (09:38):
There’s certainly an argument to be made, that the moment you name a new CEO, then you ought to be starting to think about who the next person is. That said, probably happens three to five years before you have a succession, because you need to identify the profile or start to draft a profile, for what you need from this role. You need to scan internally what candidates you have and how ready they are and where their holes are in development. And then you need to do a scan of the external world, just to see who’s out there. If you’ve got high potentials who need a little bit more grooming, you really need the three to five year period to put them in new roles, to get them the coaching they need, and to try them out in those roles, to get more insight into whether they’re the right successor, going forward.
Erica Schohn (10:28):
What’s important is to do this as a frequent process and then also to have multiple contingency plans. You shouldn’t be identifying just one single person that the company views as a successor, because a lot of different things can happen with respect to that person. That person may not develop in the way that the company is expecting. The company’s goals and priorities may change in a way that that person no longer is the best fit. And quite frankly, that person might be identified by another company as a potential leader, and then be poached and end up being unavailable to you. Having multiple candidates and keeping them all engaged and developing, is going to be really key.
Blair Jones (11:13):
That’s such a good point, Erica. Maybe you’d think, oh, well, “We just need two, because we need to decide between our two best candidates,” but really, you probably need up to five, and maybe more than that, because so many things can happen, along the lines of what you discussed.
Ann Beth Stebbins (11:27):
These candidates are aware that they are potential successors as they’re being groomed? How transparent is the process to these internal candidates?
Blair Jones (11:38):
At the right point, they are. Early on, you probably would just be telling them that you’re a high potential and we want to invest in your development, and that investing in your development might be putting you into a new role. It might be giving you leadership of a task force that’s important across the organization. It would typically involve getting that individual a coach.
As you get closer in that three- to five-year period, then there can be some value to having an outside consultant come in and do assessments where they are able to look at a number of different leadership criteria and business strategic criteria, and able to give that individual, concrete things that they need to work on, and give that information, more importantly, to the board.
(12:29):
The trick is to not start something that might be overly competitive or a horse race too early, because that can be counterproductive to the organization and can create divisions. One of the important ground rules as you start to get closer and as you do become more transparent, is letting people know that one of the things you’re looking as they go through this process, is how they support the team and how they support each other.
Erica Schohn (12:53):
I think a lot of the conversation has been focused on individuals that are at the company already and have moved up progressively in various roles at the company. There are times, though, when the company has to look outside. We’re not talking about the situation where there’s an emergency CEO search and they’re going outside to immediately hire a CEO; instead, the situation where they’re looking outside for those successor candidates, so they’re looking at people who are in non-CEO senior positions at relevant companies, who they think will be in a place, in two, three, four years, to become the CEO, and you want to bring them in ahead of time, to see how they perform and to make sure that they have the knowledge of the company that’s necessary to be the CEO, and the relationships within the company.
So those people when they come in, they typically are coming in because they know that the CEO position is a possibility. There may be others within the company that are also being considered, and these are additional people being considered, but they know. Then there becomes a discussion of how much transparency, both in the company and externally to the market, is appropriate with respect to those individuals.
Ann Beth Stebbins (14:14):
You’re bringing this person from the outside, in, because in the review process, the board has identified a gap in skillset of the internal candidates. Bringing in an external person with that skillset is part of the succession planning to identify the right candidate when the time is right, but how do you keep the internal candidates incentivized if someone’s coming in from the outside, who is shooting for that role, as well?
Blair Jones (14:43):
There’s no doubt that that can be pretty threatening if indeed there are viable candidates internally. There’s a lot of work that the board should do with the current CEO to really think about the messaging to the other candidates, and a lot of pre-thought that ought to be given to what role are you going to give each individual and make them all feel like they have a fair shot at going forward, or if they have diminished in their attractiveness as a candidate, think about what you need for them between the time that the new person comes in, and the actual succession event. Like, maybe you just want to retain them until the succession event happens, or maybe you want to retain them for a short period of time after the succession event happens, and maybe you’re transparent about that.
Ann Beth Stebbins (15:30):
But also, maybe if you want to retain them, even if they don’t get the CEO position. For example, maybe it’s the CFO. The CFO is doing a great job at being CFO. Not necessarily the right person to be the CEO, but you don’t want to lose the CFO and have a CEO transition at the same time, so it’s important to not only incentivize the candidates to stay while they’re candidates, but if they’re not the chosen successor, how do you get them to stay if they’re important for the success of the company?
Blair Jones (16:03):
That’s a very frequent question, and it’s really important. You’re balancing a lot of things. How much do you want to shackle the new CEO with somebody like the CFO? So do you say, “We’ll try to retain the person for enough time for the new CEO to make an assessment?” You want to send a strong signal that you want that person around, but you also don’t want to be hands tied if the chemistry isn’t there.
Erica Schohn (16:27):
I think there’s a two-pronged approach is —, the initial is to try to keep them for that transition period, through some type of retention or incentive award, and then double that with some type of non-monetary incentive in the form of something that excites them with respect to the role. The new CEO is going to come in and explain how they view the other individual fitting within the company, what their responsibilities are going to be. Perhaps it is something else that can be expanded in their day-to-day role, something else that really re-engages the individual. Usually neither of those, neither the money or the re-engagement, work independently. They usually go hand in hand.
Blair Jones (17:09):
The board should be thinking ahead and proactive on those kinds of issues. And I happen to have several transitions where the CFO has been given additional operational responsibilities because they’re developing more broadly beyond their CFO expertise, but also if they were to decide to leave the company, they’re then a more attractive candidate externally, because they’ve also got the operational experience.
Ann Beth Stebbins (17:31):
You’re grooming these people, giving them opportunities across the organization. Those candidates might become very attractive externally to other companies. How do you keep them while they’re in the race, from taking a CEO position somewhere else?
Erica Schohn (17:50):
Money is a tool that works on many different occasions. The other issue is that these people who are strong prospect are being looked at externally as well. They tend to only want to wait for so long. There can become a situation where they either know that they’re the heir apparent or maybe they’re on a very short list, but the biggest question seems to be, when will the time come? Because you have a sitting CEO who isn’t quite ready to retire.
We have seen an executive chairman role used in that context, meaning the existing CEO transitions into an executive chairman role, and the heir apparent then is able to take over the CEO role. It’s something worth trying for a limited transition period. It can also help in the case where you think maybe the incoming CEO needs a little bit more support. It’s probably better used for a defined time period as opposed to something that’s indefinite.
Blair Jones (18:49):
And you really have to decide how much you want to keep the individual. And if you do, I do think you put some money behind it. Some of that comes from the role you give them, that allows you to pay them more, or from a straight retention award. But it’s also the reason to have three to five candidates, because it sometimes is unrealistic if the CEO stays around longer and people aren’t willing to wait, it’s just unrealistic to think you’re going to keep everybody. So having more than two candidates is a good idea.
Ann Beth Stebbins (19:19):
What’s the CEO’s role in succession planning for that CEO’s successor?
Blair Jones (19:25):
Well, assuming that it’s an orderly succession, usually the CEO is a fairly active participant, although the board owns the full process. So they’ll use the CEO to help define the profile; they’ll use the CEO to get input on the different candidates. They’ll use the CEO if they’re vetting external candidates to help interview the external candidates and think about cultural fit and think about the attractiveness of the skills that that individual brings. However, at some point, the board has to let the CEO exit from their discussions, and they need to have frank discussions about what they really need, and make sure that they’re the ones making the decisions, because they’re the ones who will be working with a new CEO. There can be times where a CEO has a favorite and is very largely invested in one individual and the board’s not sure that individual is the right individual, and at those times, the board really has to manage the CEO’s expectations and the CEO’s role in the discussions.
Erica Schohn (20:31):
One question that sometimes comes up is, to what extent should succession planning be a specific goal in a CEO’s incentive package? Typically, companies don’t take that approach, or we would recommend against it. One specific reason is disclosure of their bonus programs in the CDNA. Companies typically don’t want to signal that to the market prematurely, so instead of building it into any specific incentive plan goals, instead, we would typically be part of the annual review process for the CEO and regular CEO and board discussions.
Ann Beth Stebbins (21:14):
Are there any other trends in CEO succession planning that you’ve seen in recent years, that you’d like to highlight?
Blair Jones (21:22):
The focus on getting the right profile and really thinking about how that profile meets the evolving business strategy. Companies are just getting better at that.
Companies are more widely using assessments to not only use what their own internal development processes might tell them about people, but get a more objective assessment, scanning the outside world, even before you’re ready to enter into a formal succession process, you’re starting to develop a profile. It’s good to see who else exists externally.
Tenures for executive chairs is another trend. So while companies may still be continuing the trend of having a CEO move into an executive chair role, shortening those.
The other thing that I find interesting and really a best practice, is having at least the compensation committee or the nominating and governance committee spend time thinking about who the next level of candidates are, thinking 10 years down the road, who the candidates are, and what kind of roles and development might they have as they make their way into a more formal candidate pool for the next succession.
Ann Beth Stebbins (22:32):
Any trends you’re seeing on who ultimately is the successor, internal versus external?
Erica Schohn (22:39):
When you have a regular planned process, it’s more likely to be an internal candidate. And again, whether that’s the person who came up from the mail room over the years or whether that’s someone you identified externally a few years prior, I think both of those get categorized into being an internal candidate. As Blair noted, more and more boards are expected to do external checks, see what’s out there on the market. You may have someone that you think is a good internal candidate, and then either something doesn’t go as planned with respect to that individual or that individual’s no longer available, and then you do go externally. The more the situation is unplanned, the more likely companies are going to need to go external.
Blair Jones (23:27):
They’d go external for that reason. They’d go external if they need to shift strategy and they don’t have those skills internally, they would go externally if they have a transformation or a turnaround and the current team just hasn’t been able to make that happen, or they’d go external if they don’t think they can develop the current suite in the appropriate period of time.
Ann Beth Stebbins (23:51):
Well, Erica, Blair, this has been great. Thank you for participating, and really enjoyed the discussion.
Blair Jones (23:57):
Yes, thank you for having us.
Erica Schohn (23:59):
Thank you.
Voiceover (24:00):
Thank you for joining us for today’s episode of The Informed Board. If you like what you’re hearing, be sure to subscribe in your favorite podcast app, so you don’t miss any future conversations. Additional information about Skadden can be found at skadden.com. The Informed Board is a podcast by Skadden, Arps, Slate, Meagher and Flom LLP and affiliates. This podcast is provided for educational and informational purposes only, and is not intended and should not be construed as legal advice. This podcast is considered advertising under applicable state laws.
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