With more emphasis than ever on staying afloat, CEO succession is being re-examined and new strategies are being devised to identify and foster internal candidates. Stephen Miles and Theodore Dysart, managing partners at Heidrick & Struggles, led a Directorship roundtable on innovations in executive succession planning.

The first challenge, according to Miles, is that boards need to move beyond the initial feeling that there are no great candidates within a company. While there may be well-suited external candidates, looking within first may be the best solution. “Get over the paradox that no one inside appears to be perfectly qualified for the position at first glance,” he advised. “Succession planning requires a board to consider the future needs of the company.” And that means keeping a close eye on potential inside candidates.

During difficult times, there is a tendency to want to put succession on the back burner.

Lines of Communication
When narrowing down the list of contenders, keep in mind that communication with internal candidates should be the first priority. Dana Mead, chairman of MIT Corp., the governing body of the Massachusetts Institute of Technology, and a director at Pfizer, said that when internal candidates realize that a board is also considering external options, it can lead to backlash or an exodus of top talent. Mead stressed that internal candidates might become restless, questioning why they aren’t being promoted or why the company is considering “an outsider” for the post. “It may be because the board has a dysfunctional succession plan,” he explained.

During difficult times, there is a tendency to want to put succession on the back burner. “The idea is, ‘we’re trying to survive—we aren’t thinking of succession,’ ” said Thomas L. Doorley, chairman and CEO of Sage Partners and lead director at Natrol. Doorley also pointed out that sometimes the CEO believes he or she is the only person who has the ability to guide the company through the rough patch. A challenging economy is exactly when CEO succession planning matters the most, advised Dysart, since volatile market conditions might force a change in the top post, either voluntarily or through termination. A CEO might be doing a good job with a flailing company in a turbulent economy, but if stocks are down 20 percent, investors are likely to cry foul and may call for new leadership.

Boards are increasingly devising formal processes for identifying capable individuals in the organization who are qualified for top posts or should be groomed for future consideration. “What are your tools for making that determination about who should be on the list?” asked Doorley.

“It’s important to know the top executives in the organization who should be managed, to make sure they are acquiring the right skills,” noted Miles. As a board looks deeper into the organization for potential candidates, directors need information about each individual to determine who is high on the list and what the next tier looks like. Since the board rarely sees employees below the C-suite, they are often unable to know each potential candidate well. When sizing up candidates, particularly in a larger company, Miles urges boards to have brief synopses written on each person since it would be difficult to remember details about 100 or more individuals who might be discussed.

When to Say Goodbye
“Changing the guard—terminating a CEO—is there a better way to do it than what we often see now?” asked Jeffrey M. Cunningham, chairman and CEO of NewsMarkets. The panel agreed that there is no easy way to remove a CEO once the board decides termination is the answer. When changing CEOs, boards must consider current business needs and future scenarios. While the decision should be carefully weighed, it should not be delayed and should follow a set process.

Engaging the whole board by tapping into members’ expertise is key. “While it’s unlikely that every member on the board will know the ins and outs of a company, a good board consists of a medley of experts: those who can lay out industry-specific information and others who have experience on how to run a business,” said Miles. “The compilation of talents is what truly makes for a well-rounded, well-informed board.”

MIT’s Mead agreed, emphasizing that succession should never be the responsibility of just one committee— the entire board needs to contribute. “Make it a regularly scheduled item, so you know every six months what is going on,” said Mead. When the compensation committee meets, either after or during the same meeting, Mead advises that succession candidates under consideration should go in and meet with the board.

Miles cautioned boards to be realistic about evaluating candidates, suggesting that sometimes it can be counterproductive for boards to be too focused on finding faults or shortcoming in the current or prospective CEO. “Pick one or two things to improve about someone—not 20 things,” he advised.

Role Migration
While the road to the top post must be mapped out carefully, panelists agreed that the path to other executive positions must also be re-examined. Doorley said the role of the COO is changing and is now often focused solely on operations, so many companies are uncoupling that role from the president’s title.

But the COO role differs in each company and industry, which makes it difficult to create a “one size fits all” scenario for succession planning. “There’s no ‘COO magic [formula]’ because they are unique to their company,” said Miles, who likened the roles of CEO and COO to a Venn diagram. “The COO is a customized role—if the CEO and COO roles overlap too much, it won’t work,” he concluded. He also noted that many CEOs have been reluctant to have a powerful COO, although that sentiment is changing.

Panelists pointed out that the role of the CFO depends on the industry. “In the biotech industry, the CFO is the second spokesperson after the CEO,” says James Frates, senior vice president, CFO, and treasurer of Alkermes. In some industries, the CFO is taking on responsibilities such as working more proactively when closing deals and communicating with clients and other partners. Board members should be familiar with a company’s specific requirements, so qualified internal candidates are on deck for consideration when necessary.

Engaging Your Board
Due to increased scrutiny from both shareholders and the public, many CEOs are now under intense pressure to demonstrate and sustain performance. Typically, however, they’re not focused on finding their own replacement. An effective board must take the reins and be proactive by putting a disciplined succession-planning process into place that emphasizes the recognition and cultivation of internal talent.

No matter who takes the oath of
office in January, directors can
expect significant changes in corporate
governance to come out of
Washington.

Executive Recruitment

As baby bboomers approach retirement,
many will find their benefit plans are
insufficient to meet their financial needs,
much less their goals. The switch from
traditional pension plans to 401(k) plans
will leave millions of retirees with too little
or, perhaps worse, less than they thought.

As the 2008 proxy season draws to a close, it
seems safe to conclude that the pace of
investor activism, including demands for
board representation, will continue to
increase.

Uninstructed votes cast by brokers in board elections have been a growing flashpoint between directors and investors, with the Securities and Exchange Commission caught in the middle.

Although it is a time of challenge for directors and CEOs, some get hurt while others get
helped.

Executive compensation and perceived abuses of the system by some companies have continued to put compensation committees under the microscope.

The plaintiffs’ bar is raising the stakes in the global-warming debate through what AJP partner Southeastern Legal Foundation (SLF) describes as “the most dangerous litigation in America.”

Commentators taking note of the recent felony convictions of several high-profile plaintiffs’ lawyers, including Bill Lerach and Melvyn Weiss, have declared that the tort reform battle is over and the corporate defenders have won. Nothing could be further from the truth. While a few big guys may be cooling their heels in jail, it’s still not safe to tread in America’s litigation waters.

The Securities and Exchange Commission may not take up controversial issues like shareholder access to the proxy this year, but boards can expect action on other topics. One hot-button issue is credit-rating agencies such as Moody’s, Standard & Poor’s, and
Fitch. Chairman Christopher Cox has been saying all year that the SEC is working on new regulations for the industry, which has been blamed for the current market turmoil after it gave triple-A or equivalent ratings to mortgage-based securities that performed
well below investment grade.

While some litigation trends in the United States are troubling for business leaders and directors, what is happening in many countries around the world can be downright scary. As the pace of globalization intensifies, board members and corporate officers open
themselves up to personal liability in far-off jurisdictions. We sat down with Suzan B. Friedberg, assistant vice president, foreign general claims at American International Underwriters, and Steve Whelan, executive vice president at AIG Executive Liability, to delve into some of the trends taking shape in Europe, Asia, and South America. They shared some good advice on what directors can do to manage their global liability exposure.

The Hay Group’s executive compensation publication offers real-world examples of how companies design and implement executive packages to attract, retain, and motivate their key people.

CLICK HERE TO VIEW THE REPORT (pdf).

Over the past six to nine months, it has seemed as if many major American and European financial institutions have been getting government bailouts. Only the governments haven’t been in Washington or Paris. Instead, China invested $5.5 billion in Morgan Stanley and another $1 billion in Bear Stearns (although the later investment was not enough to stave off disaster). Singapore gave $4.4 billion to Merrill Lynch, $9.75 billion to UBS, and $6.9 billion to Citigroup, which raked in another $7.5 from Abu Dhabi. Kuwait has ponied up, as have Korea, and Japan.

In 1901, George Westinghouse sent a letter to his shareholders explaining that Westinghouse Electric hadn’t issued financial reports for the prior four years because it wasn’t in “the interests of all.” The company didn’t bother with another annual report until 1906.

Last November’s decision by the Securities and Exchange Commission to restrict shareholder access to proxies kicked off a new round of attacks by opponents of the rule who are more determined than ever to gain access to corporate ballots. In fact, activists contend they may gain more ground than if the SEC had voted the other way.

The building backlash against high executive compensation is honing in on a new target: The national consulting firms that many large corporations use to construct CEO pay packages.

Do stockholders own the company? To most board members, and probably most Americans, the idea is so axiomatic that the question hardly seems worth asking. Yet a long-simmering debate on the age-old argument over the board’s responsibilities to shareholders versus the arguably inherent rights of all company stakeholders recently burst out in the open, shedding new light on that central question.

A Securities and Exchange Commission (SEC) plan, passed unanimously last month, to allow foreign companies listed in the United States to stop reconciling their financial statements to U.S. accounting standards is getting panned by investors.

In 1932, a classic book called The Modern Corporation and Private Property spelled out the view that underlies most of the corporate governance activism in the United States today. Written by two academics named Adolf Berle and Gardiner Means, the book explained how the birth of the modern publicly owned company in prior decades had brought about a fundamental split between ownership and control.