According to an interesting column in yesterday's Wall Street Journal, which you can find here, only about half of corporations have CEO succession plans. I have to admit that I found that statistic surprising. I understand that a CEO probably doesn't want to even contemplate being replaced, but how could a board fail to ensure that a succession plan is in place?
Those of us who teach the basic corporations class spend a fair amount of time discussing the responsibilities of the board of directors, and, arguably, at the very top of the list is the selection of the CEO. A board knows that the CEO won't be the CEO forever, so failing to implement a succession plan seems to be pretty sloppy corporate governance.
Of course, sloppy corporate governance isn't necessarily illegal. And I would doubt that a board's decision not to implement a succession plan constitutes a breach of fiduciary duty. The decision would probably be protected by the business judgment rule. If the board didn't inform itself about the succession issue, the business judgment rule might be rebutted, but I doubt that occurs very often. More likely, boards are aware of the succession issue, but choose defer to the CEO, who may not want to work with a successor. Perhaps a plaintiff could argue that the board's decision not to require a succession plan reflects a "we don't care about the risks" attitude amounting to a breach of the duty of good faith. But I doubt that would be a winning argument. Any thoughts on this issue?
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1. Posted by Jeff Lipshaw on November 27, 2007 @ 17:50 | Permalink
Several thoughts:
I haven't read the WSJ article, but what does it mean by "succession plan"? Does it mean the grooming of a successor to the CEO for his/her eventual retirement, or does it mean an emergency plan for the CEO being hit by the proverbial beer truck?
What is the empirical support for the conclusion that "more likely, boards are aware of the succession issue, but choose defer to the CEO, who may not want to work with a successor"? Being a CEO is different than being the head of a major division or a major function, and not many companies have heirs apparent a la a COO who is being groomed to take over. (When you see it, it is often because the COO was hired to be the successor with a planned retirement.) Indeed, in most companies, the success of the CEO depends on the competence of his/her direct reports, and why would the CEO not want to "work with them?"
What is the empirical evidence for the statement that most boards "defer to the CEO" on the succession issue?
Other than out of pure academic speculation why would we be thinking about a plaintiff making a breach of fiduciary duty claim on a "lack of succession plan" theory? The CEO dies in a plane crash, and the stock drops precipitously because there is no successor? The new CEO simply fails and the theory is that one who came in under a succession plan would not have?
Finally, many companies may make the business decision that because of the differences between what operational people and the CEO do, all CEO hiring will in fact come from the outside. And it doesn't have to happen because the CEO resists having good people below him/her, but because CEO-capable people may not be willing to wait out the length of time it takes to succeed to the top under a "succession plan."
2. Posted by Broc Romanek on November 28, 2007 @ 9:28 | Permalink
I looked back at the past survey results on CEO succession that I have posted on TheCorporateCounsel.net and going back quite far, the ratio of boards with succession plans amazingly has been at the 50% level over the years. What's similarly amazing is that we have had more governance reform than one can bear this decade - and yet, none of it has dealt with what arguably is the most important task that boards should be thinking about...
3. Posted by Business Loans on March 23, 2011 @ 12:04 | Permalink
Risk is part of the game. That's what makes it exciting!
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