November 27, 2007
CEO Succession
Posted by Jennifer O'Hare

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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