Over the last dozen years or so, succession planning processes have continued to receive higher levels of attention by boards and other stakeholders. This is evident, for example, in the increasing attention to the topic in best sellers on how to be an effective board member, as well as in the increased reporting on apparent board strategies for succession. This attention is, for the most part, good news. One troubling aspect of most succession planning processes remains: the tendency for boards to be too focused on the past and insufficiently focused on the future when it comes to both the development and vetting of serious candidates.

The focus on the past is understandable. The word “succession” implies that the past is an important referent. Succession is what comes “after.” When a company has been doing poorly, boards are anxious to find someone “different;” someone who does not have the perceived weaknesses in personality, skill, ability, and/or experience of the incumbent. When a company has been doing well, there is a natural, hopeful tendency to find another just like the incumbent on a shelf. When a clone isn’t available it isn’t difficult to hear the gnashing of teeth—just look at how pundits panicked about the thought of Tim Cook leading Apple.

The problem with this focus on the past is that it is a distraction from what really matters—the condition of the road ahead. The past keys to CEO success may not be the future keys. The challenges the company will face may not be similar. The strategies that provide advantage may not be similar. The best way to get succession right is by understanding what lies ahead and is growing larger as one looks through the windshield, not that which is growing smaller in the rear view mirror.

Not enough boards spend sufficient time envisioning what the future holds and, as a result, what the key competencies are for the next leader. This is critical because that understanding of the future needs to shape how internal candidates are assessed and developed. It also determines where and whom a board looks to for viable external candidates. And it is a tiring process because the key question is always ‘”what is around the next curve?”—that is, the necessary capabilities for the next leader are likely an evolving set. This is no doubt particularly true in the current economic malaise seizing the globe.

A second critical characteristic of successful succession planning is distinguishing between the event and the process. Boards have long viewed succession as an event—and to a great degree it is. But that event cannot be pulled off either gracefully or effectively if the process of understanding shifting company needs, identifying and growing internal candidates, and continually scanning the external market for candidates has not been continually running in the background.

To get it right—to have a succession plan that by its own nature doesn’t doom its execution—boards must understand the relatively small role the past has in determining what the next leader looks like. That energy is better spent on understanding what will be demanded by the road ahead.

Stephen Miles is a vice chairman of Heidrick & Struggles. He runs Leadership Advisory Services within the Leadership Consulting Practice and oversees the firm’s worldwide executive assessment and succession planning activities. He is also a key member of Heidrick & Struggles’ Chief Executive Officer & Board of Directors Practice.

Jane Stevenson

Succession planning should be a key priority for boards in order to drive sustained growth. Boards should consider steps they can take to develop a deep bench of future CEO candidates – internally and externally – both for the near term and 3-5 generations into the future.  Here’s how boards can ensure they are identifying, developing and retaining those leaders now.

1. Plan in Advance
CEO succession should not be thought of as a short-term process or an event triggered by the need to replace the incumbent CEO. Board/CEO discussions should be on-going and should address the company’s needs for the short, mid and long term. Ideally, the board should be thinking 2-3 CEO moves ahead.

2. Engage the Board
The board should fully own the CEO succession planning process and meet consistently throughout the year to discuss succession bench strength for short-, mid- and long-term needs. Look at leaders both inside and outside the company; understand who the rising stars are in your industry sector. Be involved in talent development and identify the leaders who will define the future. Ideally, boards should set up succession subcommittees to drive this process.

3. Set Up a Formal Assessment Process
Establishing a formal assessment process helps ensure standards for sustained leadership are met. Facilitated by the CEO, it also provides the board with another opportunity to evaluate priorities and needs. A formal assessment process ensures that board members have quality information with which to evaluate future leaders.

Peter Thies

4. Create a “Future CEO” Profile
The board should create CEO profiles that align with the company’s business strategy, representing the short-, mid- and long-term competencies that mirror the anticipated strategic needs of the company. Having future CEO profiles helps to ensure that the right bench strength is in place for future generations of CEOs.

5. Expand the Pipeline
The wider and deeper the pipeline of candidates is, the better. While companies should first look to develop talent internally, they should also have knowledge of top talent in the external market. An expanded pipeline of quality internal and external candidates provides more options to the board at any given time. Multiple options lower the board’s risk factor.

6. Expose the Board to the Bench
There are at least seven future CEOs in every organization. Board members should interact with the company’s highest potential leaders in a variety of settings. In addition to board presentations, high-potential leaders should interact with the board through regularly scheduled board dinners, board mentoring opportunities or rotating one-on-one/small group sessions with board members. Greater first hand exposure to the company’s top talent gives board members valuable insight into the company’s true executive pipeline.

7. Address Succession Dynamics Head On
Succession is a sensitive topic for boards and CEOs. This should not deter the process. There are straightforward ways of aligning the board and CEO on the process, avoiding “horse races” internally, engaging the incumbent CEO and productively managing expectations of all involved.

8. Talk Succession Regularly
The board should plan for a formalized annual discussion with the CEO on succession planning along with at least one mid-year update.  These sessions should keep the topic on the board’s radar as a continuing priority.

9. Manage the Transition
The handoff between incumbent and successor should be planned well in advance. Communication should be planned carefully, and all parties involved should know their role in the process.

10. Plan for Sudden Loss of Leadership
In parallel with the long-term approach described here, companies need to have an emergency CEO succession plan in place at all times.  This plan should be reviewed at least once annually, and should include multiple options for leadership.

Jane Stevenson is vice chairman of Board & CEO Services at Korn/Ferry International’s Atlanta office. Peter Thies is senior partner and industry leader in the Financial Services Leadership and Talent Consulting division at Korn/Ferry International, operating out of their New York City office.

When the personal computer was still locked out of the IT department, Jobs launched into orbit although at the time how far he would go was not given even scant recognition. Later, IBM decided he was onto something, but unlike his 1955 birth year brethren, Bill Gates, Jobs refused to play ball and did it his way, sticking with a closed operating system. Despite some early success, Apple couldn’t withstand the onslaught of the clones and the Windows/Intel dominance—people forget that for years Apple ran on Motorola chips, again proving that if there is a right way to do something, there was also a Jobs way.

Photo Illustration/Photo of Steve Jobs: Associated Press

After being summarily removed by his board, he left Apple for 12 years. No Moses ever spent more time in the wilderness looking for the Promised Land. He created Next Computer and picked up a small asset called Pixar for $10 million from George Lucas’ ILM studios, who was losing it in a divorce settlement. Jobs spent many miserable years fussing with Pixar until something called Toy Story was launched for Disney. He returned to Apple more than a decade later when the company was written off and no longer relevant except to a few educators and graphic designers. It was a signal moment for a company in the new, new world of Silicon Valley. Michael Dell famously wondered why Apple even continued to exist. Jobs accepted a $1-per-year salary, part of his arrangement to turn things around. What happened then is something we refer to as history. Jobs slowly and quietly began building the transformation that would become the Apple of today, the largest or second largest company in America, focused on the only true infinite resource—communications and entertainment. By some strange calculus, it also was to become the most renowned, admired, emulated and envied company in the world.

What happened? What can we learn from him?

The secret to Jobs’ success is, well, jobs. That is, he made working for Apple a mission and found bright, talented teams who were willing to endure his rants, which were legendary, and his fixation with details and perfection. His team knew Jobs’ wallet was guided by his heart, and that he was not in it for the money, but for the glory of building something great and everlasting, or to use the more common cliché, sustainable.

When you visit Silicon Valley, you see lots of bright young people attending company social events, Friday afternoon pizza parties and the like. Most of them are talented beyond description. That’s the problem. They know what’s happening to their companies before the companies know it. What commands their attention is hot technology that is changing the world now and tomorrow. To keep the young and restless from becoming the old and restless, companies must give these incredibly valuable folks a reason to stay. When you work as hard and long as the average engineer in Silicon Valley—really they’re the equivalent of artists in a Medici studio—and the stock options run south, it means years of hard work are now lost to the entire generation working for the company at the time. So the star engineers, creative designers and sales people, not to mention executives, leave and those remaining are demoralized. It becomes impossible to make a workforce move under duress, find innovations during tough times, and stick with a plan that may take time to work. That’s why Google is getting long in the tooth, and why Cisco and Yahoo are having trouble, and why Microsoft is always fiddling with another round of dividends.

Technology has a loyalty depletion problem because the new is not invented in the same place as the ‘old new.’ Options are to Silicon Valley a drug that cures job angst for a period of up to four years, the typical start-up cycle for venture-backed companies. Once they reach that level of maturity, it’s not fix or fold, it’s fund or fold and when funding dries up and options are under water, there is always another start-up down the road.

Jobs managed somehow to withstand this inexorable cycle, and he found a way to keep employees focused and fixated on building great products simply because he made them believe they could do something great. His creation is really about knowing how to motivate people, not just create technology. Nothing like this turnaround has happened before in Silicon Valley. Steve Jobs proved that human capital is at the center of all value creation. It’s a simple lesson, hard to learn.

Jeff Cunningham is managing director and senior advisor to NACD. He is nationally known for his views on boards and corporate governance. Prior to starting Directorship magazine, he was publisher of Forbes and managing partner of the U.K. private equity firm Schroders. He has served as an independent board chair or director of 10 public companies.

Ted Dysart

There are numerous issues that have come to light over the last couple of years (and some which have been raised for decades) with regard to Corporate Governance and an overall feeling of hurry up and wait. Proxy access seems to be on the minds of many especially with the court ruling against the SEC, and the SEC deciding not to appeal. But this is not the end of the road for proxy access debate; in fact, the debate is on-going. SEC Chairman Mary Schapiro has made it clear that her intent is to find a way for shareholders to have an equal say in director nominations and will not be backing away from the issue. The arguments are passionate on both sides and there doesn’t seem to be an easy resolution. Regardless of the official regulations, companies need to take a look at their own practices and make sure they are working toward an amicable balance between what is right for the company and what the shareholders are demanding. We are seeing many companies enacting their own best in practice regulations with regard to this issue which clearly lay out who can have access, what the protocol is for submitting material to be included in the proxy and what type of communication shareholders can expect with regard to submissions. The reality of today is this: Shareholders want to be heard and boards had better (at the very least) listen.

Another topic that gets a lot of press is say on pay, which remains a divisive topic. It seems to be a subject that is always put in the spotlight when the economy is not as strong as investors and the public at large would like it to be. It is also a favorite topic in the media, especially when there is a shakeup at a company. Investors always want their money to be used wisely, and having a say on pay is part of that equation. Should top executives get flat rate pay with a predictable bonus structure based on performance, or is there room to reward and penalize based on performance and health of a company? And what about change-in-control compensation? More importantly who decides? Do you trust your board to make the right decision for the company and put personal feelings aside when it comes to appropriate pay decisions? And how often should votes take place for both say-on pay itself and the frequency of those votes which the SEC says should be revisited every six years. Will we lose great leaders to companies overseas that can and will pay more without the intrusion of the government and shareholders?

It is important to note that Dodd-Frank was almost 850 pages and requires more than 240 rule makings and nearly 70 studies. By comparison, Sarbanes-Oxley was 66 pages long and mandated 16 rule makings and just 6 studies. It should go without saying that there is still a lot of legal red tape and issues to be sorted out which will take years and billions of dollars. While the major impact of Dodd-Frank has yet to be felt we can look and wonder about those issues that have surfaced. Will the whistleblower protection remain unchanged? Will there be more reform with regard to background disclosures for board nominations? Whatever side you find yourself supporting on the various legislative issues, it is clear that companies need to keep a close eye on the issues and continue to organize their board to fit the needs of all interested parties— government, shareholders, executives and employees.

Theodore L. Dysart is a vice chairman with Heidrick & Struggles where he is a leader in the global Board of Directors Practice.

Click here to watch the CEO Succession and Compensation webinar.

High-profile CEO succession failures have demonstrated negative impact on the company’s stock and create a host of challenges related to employees and public relations. Moreover, it is clear that when a company goes “outside” to find a new CEO, it’s more costly-79 percent of those CEOs who are paid more at target than the prior CEO are external hires.

One of the questions posed during the webinar was about the performance of internally developed CEOs versus externally recruited CEOs. A recent study by the Kelley School of Business of Indiana University, led by Fred Steingraber, chairman emeritus of A.T. Kearney and chairman of Board Advisors, directly addresses this question. An article outlining the study’s findings (co-authored by me) was recently published. The study, which details the superior performance of internally developed CEOs, examined the leadership of the most successful non-financial S&P 500 companies from 1988 through 2007. The 20-year duration was critical to the study because it minimized distortions of performance that could have occurred over shorter time spans of three, five or even 10 years. In addition, this two-decade period was characterized by different economic cycles, globalization, dramatic technology advances, shifting consumer preferences and changes in leaders competing under a wide variety of conditions.

In our article, we summarized how this group of 36 S&P 500 non-financial companies was distinguished by consistent, superior leaders over the 20-year span, outperforming the remaining S&P 500 firms in seven measurable metrics: return on assets, equity and investment, revenue and earnings growth, earnings per share (EPS) growth and stock-price appreciation. We believe this study demonstrates the ability of “home-grown leadership” to consistently generate superior results and the importance of the board’s focus on effective CEO succession.

Karen Kane Consulting provides strategic communication counsel to CEOs and boards of directors. Email her at Karen@karenkaneconsulting.com to receive the full article about the study.

As a result, there is no more important responsibility for any board of directors. Yet many directors devote only cursory attention to what should be a vitally important endeavor, delaying the succession-planning dialogue until pressure-filled circumstances necessitate a rushed or unplanned transition at the top. This is unacceptable. As the CTPartners Board of Directors Institute on Human Resources has highlighted, companies that may best be characterized as failed or failing are all too often the same companies that have failed to devote adequate attention to succession planning.

Keith Meyer

Why do boards delay or overlook this process? Explanations abound, although none justify the failure to act. Directors may be somewhat intimidated by CEOs who hold management reins too tightly, or they may fear the complexity of the succession- planning process. In other cases, boards fail to appreciate the risks they will face, either when they find themselves ill-prepared for a necessary leadership transition or when forced to choose between limited options.

As growing numbers of boards have learned, however, there is, quite simply, a better way: one that is structured around a timely, thoughtful and comprehensive CEO succession-planning process. Ultimately, it should involve a best-in-class field of internal and external candidates in order to truly identify the right leader for the future and then prepare him or her to assume the post. This process needs to start, as many business experts agree, with a concerted effort to achieve full alignment between the board, the current CEO and the chief human resources officer regarding the future CEO success drivers.

Without the right strategic frame of reference, there is really no “true north” to guide the succession process. Board discussions should focus on the company’s major sources of long-term growth and value creation, optimal timing for the next leadership transition and meaningful criteria with which to evaluate potential candidates and define future CEO success.

When it comes to succession planning, we have found that “one size fits one,” where the process works best and most effectively when tailored to each organization’s specific needs and circumstances. Many of the complexities and problems that boards associate with succession planning stem from a misguided attempt to impose a standardized “cookie cutter” approach to every organization. How could Apple, GM and P&G use a common succession approach when their leadership models, corporate cultures, industry dynamics and future value-creation challenges are so different?

A key early success factor is to build upon existing top-team assessment and CEO succession-planning information, and then embed a SuccessionSigma™ architecture as the board moves from alignment to action. The primary objective is to craft and carefully orchestrate a succession plan that is custom-built, results-oriented and fully transparent.

One reason that directors fear the complexity of succession planning is that they have little or no experience with it. Some directors struggle with how much autonomy to give the current CEO in setting the succession pace and developing the short list of future candidates. Other directors find it difficult to challenge the CEO’s thinking on the key success criteria of the next CEO, while some boards underutilize the chief human resources officer throughout the succession process.

We have found the most successful CEO transitions involve a few critical “non-negotiables” along with an open, transparent communication channel between the board and current CEO. In one recent case, the board self-identified its own performance to be one of the most important factors in its CEO success and took action to improve the way the full board and committees operated in parallel with executing a successful CEO transition.

CEO succession planning is not a simple, straightforward exercise. But as with training for a marathon, with the right discipline and rigorous preparation, results will almost always be impressive.

Keith Meyer is vice chairman and head of Global CEO & Board Practice at CTPartners. Email him at kmeyer@ ctnet.com.

From ad hoc to process
Board member selection is always critical; this is never more true than when choosing the right person to be the lead director. These placements are more difficult to undo than management selections, yet they often fail the test of process and rigor. How can boards put structure and discipline around this all-important decision?

Proper process starts with developing, in detail, the forward- looking criteria that the lead director should possess. Decision-makers should gather input from multiple stakeholders, including the entire board, the CEO and, in some instances, the management team. Through this fact-finding exercise, the company aligns itself around what it needs and expects from this critical role, ultimately leading to a more successful selection. Soliciting feedback from a variety of sources both within and outside the company can provide clarity about the expectations of what is sometimes a nebulous position within the board.

Timing
From a process perspective, it is important to think ahead so that the company is not conducting lead director and CEO successions at the same time. Planning these events well in advance is critical, particularly since the lead director should play a primary role in running a planned CEO succession process. Further, lead directors are often called upon to step in on an interim basis when there is an unplanned succession event. Most recently, Neil Austrian stepped in as interim chairman and CEO at Office Depot when Steve Odland resigned; earlier, Robert Druskin served as interim CEO at E*Trade Financial when Don Layton retired and Robert Matschullat filled in as interim chairman and CEO at Clorox when Jerry Johnston suffered a heart attack. Needless to say, having an established lead director in place can provide stability during a CEO succession, which is a situation that is often fraught with risk and uncertainty.

Identifying potential lead directors should actually begin earlier than one might think—at the time of initial recruitment. When a board is recruiting new directors, it should keep in mind those candidates who might be able to step into the position of the lead director one day, applying the same thought processes used when adding a senior executive to the company. Having more than one option is ideal, so that the board can select a candidate based on the best fit for the needs of the company and the CEO at the time. The number one way to mitigate risk is to give yourself options.

The best lead director?
The best lead directors bring a perfect mix of substance and style to the job. From a style perspective, the role requires a combination of interpersonal, advisory, leadership and Socratic skills. The lead director must have a strong relationship with the CEO and be able to effectively interface with the board. These directors also need to have a broad range to their style, with the agility to move from facilitator to coach to strong leader. Advisory skills are critical when it comes to the lead director’s relationship with the CEO. It is imperative that the CEO completely trusts the lead director to both effectively probe and challenge, as well as to be a strong supporting voice when needed.

For the most effective interface between the CEO and the lead director, “fit” should be assessed. From a CEO’s perspective, this will require the lead director to be mature in the sense of knowing the line between governance and management; every CEO has had a lead director or board member who becomes too “executive.” In the post-financial crisis era, even more so than in the post-SOX years, boards have moved into management’s space. The lead director needs to have the discipline to maintain the fine line between governance and managerial oversight. Recently retired CEOs often struggle with this; they typically need two to three years out of the role to hone their director skills before taking on the lead director role.

From an experiential perspective, succession expertise is important, though often overlooked. It is one of the most critical functions of the board and one in which the lead director plays a crucial role. Let’s face it: very few directors have ever hired more than three CEOs. Therefore, this may rate high on the experience scale but low overall when one thinks of areas of expertise. It is also helpful for the lead director to have actually held the CEO title. Having the “battle scars” and experience in the corner office helps them to credibly coach and mentor the CEO and liaise with the board in a more effective manner.

Finally, the lead director should be someone who has the time to truly invest in the role. In other words, this cannot be someone’s fifth current board. The person selected will need to make the role a significant priority in his or her portfolio. Assuming that other requirements are met, simply investing in the role can change the overall effectiveness of the person and make the difference between a good and great lead director.

The reality is that high-performing lead directors are not born; they are developed and grown over time: Life experiences and a level of calm from having lived through a variety of situations is crucial. The right candidates will embody a blend of executive and board experience with the right relationship touch to mold a board of high- powered directors into a cohesive team.

Stephen A. Miles is a vice chairman of Heidrick & Struggles and runs the firm’s Leadership Advisory Services. He specializes in CEO succession and board development work and also serves as an executive coach to CEOs around the world. Theodore L. Dysart is a managing partner with Heidrick & Struggles, where he is a leader in the Global Board of Directors practice and a member of the CEO Search practice.

Mader opened the discussion among the assembled public company directors by soliciting their opinions on how to correlate strategy with leadership development. Robert Dinerstein recounted the story of a management turnaround at a troubled biotech company on whose board he served. Trouble began to percolate when the board realized that the only corporate strategy belonged to the CEO. “The CEO so dominated the dialogue that there was no corporate strategy—it was his strategy—and he had enablers on the board that included the chairman.” The board ultimately replaced both the CEO and chairman, he said, and with the new management team adopted new practices to ensure the board and management engaged in an ongoing dialogue about strategy. When an offer from a larger pharmaceutical company presented itself, “we were well prepared. I think in the end it benefited shareholders, because we had a sense of the value, we weren’t scared of the market conditions, nor did we have some wrong-headed sense of our fiduciary obligations in responding to the offer.”

Securing the CEO’s trust is an important part of the communication process, noted Neil Braun, so that management doesn’t feel the board is intruding or “coming too close to crossing the line from strategy” and that takes time. In one instance, Braun served on the board of a company for seven years; the chief executive had been in his post for 15 years. Only recently was the board able to devote an entire day to talking about strategic issues.

Anticipating the possibility of “a significant event” is one aspect of succession planning, said David Lynn, but boards must also consider what risks, particularly internal, are laid bare by strategy.

Should current CEOs be involved in succession planning? Mader says this is the ideal situation. “They’ve lived the job and they can be extremely useful as both a window to see through and as a reflection to look back,” he observed. Karen Hastie Willliams agreed: “You can absolutely learn from them and get a better sense of why and how they do things, and if they’re doing the job well, they have credibility.”

Sometimes a sitting CEO can “get ahead” of the board on the succession issue. That happened at one company on whose board Paul Albert served. The founding CEO selected an heir apparent, even though the board had not yet fully assessed to its satisfaction the potential successor’s qualifications and suitability. “We eventually merged with another company and management departed, so circumstances never required follow-through on that conversation with the CEO, but the point is you don’t want the CEO to be out in front of his board in selecting a successor.”

Leadership development requires bench strength for planned transitions and in emergency situations. Betsy Cohen advised that it’s important for boards to develop “a template for leadership characteristics specific to the company’s strategic objectives,” noting that a cornerstone to effective succession planning is “continual talent development.”

Citing a line from the play A Sleep of Prisoners, “Strange how we trust the powers that ruin and not the powers that bless,” Carlos Campbell said a distinction must be drawn between leadership and mentorship and boards must recognize that no leader has all the requisite skills. “A leader has to be many things: a visionary, a communicator and someone with the ability to assess risks. The challenge always seems to be one of adaptation.”

Despite the odds and conventional wisdom, sometimes two leaders are better than one, according to Braun. “We actually had co-CEOs who worked together for 15 years. One was Mr. Upside who focused on opportunities, and the other was an aggressive risk manager. By the time they came to board meetings, they had hashed through their differences and were ready to articulate how they got to the recommendation they were making to the board. It was a a great process.”

Mader then asked how open to the public succession planning should be. “It is difficult to lay out publicly who the key internal or external candidates are, for obvious reasons,” replied Lowell Robinson. “The board’s fiduciary responsibility is to know who the key candidates are internally, which is something the CEO and the senior HR person should do every year. They should lay out their strategy for developing these people further, so that they one day might succeed the CEO.”

Public identification of successors can contribute to resistance. “Some people are afraid if they are successful in developing a successor, they’re making themselves expendable,” Braun said. “I think that’s why you sometimes see psychological resistance to developing successors, even if it is unconscious.”

If disclosure of the succession process is required, said Karen Brenner, that disclosure may be fairly benign.“The board’s work in cultivation of leadership talent and succession planning would be more extensive than required to satisfy the potential disclosure obligation, but the disclosure itself high-lights the importance of the issue.”

Participants

Paul Albert – Chairman, Albert Investments; director, DigitalGlobe

Neil Braun – CEO, The CarbonNeutral Co.; director, IMAX

Karen Brenner – Clinical professor of business, Leonard N. Stern School of Business, New York University; director, Alleghany Corp.

Carlos Campbell – President, C.C. Campbell & Co.; director, Herley Industries, PICO Holdings, Resource America

Christopher Clark – Publisher, NACD Directorship

Betsy Cohen – CEO, The Bancorp Bank; director, Aetna; chairman, RAIT Financial Trust

Patricia Connolly – Director, Center for Corporate Governance; LeBow College of Business, Drexel University

Dino DeConcini – Lead director, Apollo Group

Robert Dinerstein – Chairman, Crossbow Ventures

Vincent Divito – Director, Elixir Gaming Technologies; Riviera Holdings

Virginia Gambale – Managing partner, Azimuth Partners; director, JetBlue Airways; PiperJaffray

Frank Gatti – CEO, ETS; director, Blackboard, Inc.

Joie Gregor – Director, ConAgra Foods

Steve Kalan – Associate publisher, NACD Directorship

Gail Lieberman – Founder and managing partner, Rudder Capital; director, DARA BioSciences

David Lynn – Co-chair, Public Companies and Securities Practice, Morrison & Foerster

Stephen Mader – Vice chairman and managing director, Korn/Ferry International

Laura Philips – Director, China Yongxin Pharmaceuticals; Delcath Systems

Lowell Robinson – Chairman, American Consolidated Media Holdings; director, Jones Apparel Group

Karen Hastie Williams – Director, Continental Airlines; The Chubb Corp.; SunTrust Bank

“The only explanation we can envisage for the continued major governance failings that have characterized the board’s stewardship is that the board, as currently composed, suffers from entrenchment and ossification, which renders each of its members incapable of functioning as vigorous and independent shareholder representatives,” the letter reads.

Occidental’s board is expected to scale back its executive compensation plans. Spencer Abraham, a former senator from Michigan who chairs Occidental’s executive compensation committee, told the Los Angeles Times, “We will make substantial changes to the structure of compensation to something that is much more in line with our peers.”

News Corp Drops Hurd, Names Lead Director

News Corp. said in its proxy statement that former Hewlett-Packard CEO Mark Hurd “has not been nominated for re-election to the board.” The media conglomerate ruled by Chairman and CEO Rupert Murdoch also named Sir Roderick I. Eddington—a director since 1999 and chairman of the audit committee—to a newly established lead director post. Murdoch has served as the global media company’s CEO since 1979 and as chairman since 1991. In considering its leadership structure, according to the proxy statement, “the board believes that the combined roles of chairman and CEO are appropriately balanced by the designation of a lead director with substantive responsibilities, the substantial majority of independent directors that comprise the board and the company’s strong corporate governance policies and procedures.”

Basel III Rules To Phase In Through 2018

Although global regulators have reached an agreement on Basel III, The New York Times reports that officials still need to reach agreements on limits for short-term bank risks and how to deal with banks and other firms deemed “too big to fail.” The Basel III Accord will triple the capital held by banks to cover risks, increasing it to 7 percent from 2 percent of assets. However, the rules will be phased in through 2018. Additional rules are on the horizon to deal with cross-border banks that could have adverse effects on the financial markets when they get into financial trouble.

Lead Directors Gain Clout

Lead directors are gaining clout on U.S. boards,” The Wall Street Journal’s Joann S. Lublin reports, “a development that gives the boards the potential to become more effective counterweights to powerful chief executives.” Lead directors today increasingly challenge top executives about risks, hold veto power over board agendas and often help settle disputes between companies and key institutional investors. “Lead directors’ increased stature is also evident in the number of times they’re tapped as temporary chief executives.” A King & Spalding analysis shows that 16 lead directors have assumed acting command since 2006.

Surge Seen In Fraud Tips

New awards for informants who help the Securities and Exchange Commission uncover fraud have resulted in a surge in tips. “The Dodd-Frank financial law passed in July provides for the larger bounties,” The Wall Street Journal reports, as “the program aims to get timely information from insiders close to a fraud so the SEC can bring a case quickly, limit the damage, and recover funds for victims.” Defense attorneys, though, caution that the program could spawn a flood of frivolous cases. The large bounties could also spur employees to report problems to the government rather than working through normal corporate channels and letting the company self-report any issues. William Jordan, a corporate defense attorney at Atlanta-based Alston & Bird, says, “It adds a level of inefficiency and hyper legalism to the way you’d want an ethical company to work.”

SEC: Moody’s Won’t be Charged

The SEC has decided not to charge Moody’s Investors Service for violating securities laws by failing to comply with its own procedures for rating complex derivative securities in 2007, The New York Times reports. The decision followed an SEC probe; the Commission used the opportunity to caution all of the national credit-rating agencies that it would use its new authority under Dodd-Frank to take action against similar conduct “even if it occurred outside the United States, as the Moody’s case did.”

Bank Bonuses to Come Earlier

With the specter of higher taxes looming in 2011 and banks still reeling from last year’s U.K. bonus tax, executives at some financial-services companies are considering whether to pay year-end bonuses­—traditionally doled out starting in January—sooner. Many firms are indeed looking to move part of their bonus payments from early 2011 to late 2010. Jones Day attorney Mike Shah told the WSJ: “It’s something companies ought to consider because it enhances employee morale and therefore shareholder value.” The early bonus might be a way for U.S. banks to soften the blow of likely smaller incentive payments as a result of softer revenue during the first eight months of the year.

Better Pay For Nonprofit CEOs

A compensation study by Charity Navigator that looked at the salaries of CEOs at 3,000 mid-to large-sized charities shows the median salary of top leaders was $147,273 in 2008, a 4.7 increase from the previous year, according to the Philanthropy Journal. A related story in the Houston Chronicle reported on the questionable increase in compensation for the top executive of the YMCA of Greater Houston, who is the highest paid CEO of any nonprofit human-service organization in the country. According to the Chronicle, “Compensation of charity executives has always been a hot-button issue for donors, who believe their dollars should mostly support programs and services. But federal and state officials are now expressing similar concern, especially as they try to provide services with fewer dollars.”

Director Compensation Barely Increases

Compensation for outside directors at the nation’s largest corporations remained relatively flat last year, as most companies continued a cautious approach to spending compensation dollars, according to a new analysis by Towers Watson. The analysis found that 2009 pay packages of directors at S&P 500 companies climbed just 1 percent over 2008 levels. Doug Friske, head of executive compensation consulting at Towers Watson, explained that companies have been hesitant to drastically alter pay for directors but added that the study “found that most of the handful of companies that reduced pay for their directors in 2008 have reinstated pay to levels set prior to the economic crisis.” Total compensation for outside directors at the companies studied increased to $200,698 last year, up slightly from a median value of $199,949 in 2008.

Authors Question

Shareholder Moxie on Proxy

Shareholder “say on pay” is one of the most notable portions of the landmark financial-reform legislation passed in July, because it aims to bring accountability to executive payrolls for all publicly traded U.S. corporations, reasoned Sarah Anderson and Sam Pizzigati in a recent Los Angeles Times op-ed. The co-authors of the new Institute for Policy Studies report, “Executive Excess 2010: CEO Pay and the Great Recession” assert that the legislation has codified almost the entire shareholder-driven agenda for pay reform by mandating independent corporate board compensation committees, clamping down on compensation consultants who have conflicts of interest and requiring corporations to disclose how their executive pay relates to actual financial performance. Still, the authors say that they suspect this legislative action will fail to end all of the outrageous incentives for reckless executive misbehavior, because it assumes that shareholders “once suitably empowered, will rise up and end executive pay excess.”

Whither Perqs

More than one-third of the Fortune 100 companies included in Equilar’s “2010 CEO Benefits & Perquisites Report” eliminated at least one perquisite program.  By comparing proxy information from 2005 to 2009, the Equilar report confirms what most of us already know: perqs are in a steady decline, prompted by SEC requirements for fuller disclosure.  In 2009, 34 percent of the Fortune 100 companies reported the complete elimination of certain programs.  Perqs that were discontinued most frequently? Tax reimbursements (so-called “gross ups”), insurance premiums and financial planning.

For those who have spent the last few days on the Lunar Module, the story goes like this.

CEO Mark Hurd received a letter from the attorney of an HP contractor charging him with sexual harassment. He forwarded this to his legal department that, after an internal investigation, found no basis to the claim. But in their investigation they uncovered a conscious effort to submit expense receipts that disguised the fact he was meeting with this woman repeatedly over a two-year period. The full amount of his cover up was $20,000 vs. HP’s revenues for the past two years of over $240 billion.

Did the board do the right thing: Was HP CEO Mark Hurd’s termination a sign of corporate governance run amok? Or was it a rational and systematic way of dealing with the pressures on the board to investigate management’s misdeeds, and then justify its decisions to a vocal constituency of investors, the media, the public, regulators, politicians and employees?

The answer is both. It appears to be overreaching in terms of the charge vs. the punishment, but given the environment, most likely it was necessary. So let’s look at the logic here. With such a small amount at stake, and the fact that he did not commit harassment, was the decision to terminate appropriate?  Materiality or intent to defraud were not factors in the board’s view of these violations, intent to deceive was. After HP’s fiasco with pretexting and a follow-up investigation by the California Attorney General, the board wanted to assure investors and the public that they had no tolerance for ethical breaches. They felt the risk of moving too precipitously was more acceptable than a charge that once more the board was using bad judgment. It was less about a CEO who fudged (we have seen worse) and more about a company that needed very urgently to show the world that it can manage ethical issues independently and firmly.

The result of the board’s quick action? By the time the business world had seen Mark Hurd’s confessional resignation speech, and may have seen Mark Andreessen’s very impressive responses in a CNBC interview with Maria Bartiromo, the story will have moved in two business days from an office entanglement to who will run HP. Just what HP and the board wanted and needed.

And thereby provides an important case for study for boards at large.

What were the three main things did the HP board do right?

Succession planning, succession planning, succession planning: Although the company appeared to be in brilliant hands with Mark Hurd, and at age 53 there was no urgency to develop an immediate succession plan, the company had a plan in progress–on the shelf ready to go. And this is exactly why such a plan is needed: It is not only the disasters we know about but also the ones in the making. The criticism of HP’s succession plan in the Wall Street Journal leads one to believe that only by appointing a clear number two does a company have a succession plan. But that is just not the case. In technology companies in particular with short life product cycles, it may be more sensible to have a bench of potential successors, and to always keep the option of going outside the internal team. HP moved swiftly to appoint CFO Cathie Lesjak as interim CEO, and she agreed not to be a candidate for the CEO role. This was a smart ploy that both avoids dissension and leaves the company managed in the interim by a smart, popular executive.  The company also left open the possibility of an external candidate, giving the board the widest room to maneuver. Finally, it appointed a well-known board director and technology guru, Mark Andreessen (founder of Netscape) to speak on behalf of the board with Bartiromo, and he did so brilliantly, parrying her questions and getting the points across the board needed the world to know.

Postscript
The care and feeding of the CEO is one of the board’s primary responsibilities. CEOs are susceptible; in other words, they are human. They are depicted by the media as very powerful and indulgent, but off the record their life and schedule are pressured beyond understanding which can lead to strange behavior. Some simple remedies: allow and encourage spousal travel. Invite the CEO to bring family members along on trips, friends even. It sounds like an old fashioned bromide, but the other alternatives available to relieve the constant pressure on these key individuals can be very costly, as we have seen.

Jeffrey M. Cunningham is a frequent speaker and writer on governance topics and the boardroom. He is managing director and senior advisor to NACD and has served on 10 public company boards in all capacities, including as chairman of four.

The views expressed in this column are strictly the author’s and do not necessarily reflect the views of NACD.

The report, titled “CEO Succession 2000-2009: A Decade of Convergence and Compression,”  presents data on CEO succession over the past decade and reveals global trends regarding CEO turnover and the new role of the chief executive. The research, conducted by Ken Favaro, Per-Ola Karlsson and Gary L. Neilson, found that in 2009 worldwide turnover rates remained at the relatively high level of 14.3 percent, a percentage that hasn’t changed much in the past five years. Regional succession rates in 2008 also remained consistent.

“The harmonization of CEO turnover rates suggests that global governance norms are emerging—not by fiat, but through practice—across the world and in every industry.”  This convergence is accompanied by specific trends that have redefined the role of the CEO.

In America and Europe, there is an increased tendency to split the CEO and chairman roles, despite no evidence that one method of governance outperforms the other. In Europe, the percentage of incoming CEOs who also hold the chairman role dropped from over 60 percent in 2002 to 7.1 percent in 2009. North American companies showed similar tendencies.

Gary L. Neilson, a senior member with Booz & Company and co-author of the report, believes that, despite no proven performance benefits, this separation of powers is “good for accountability and also for focus.”

Neilson and the team at Booz did find a trend that corresponds directly to improved performance, however; four out of five incoming CEOs in the past decade were appointed from within the company. This is not simply a global coincidence. The trend makes perfect sense, because, as the report says outright: “Insiders perform better.” Insiders are more knowledgeable about the company, its challenges and opportunities. They are familiar with the people surrounding them and may appear more accessible to others. These qualities reflect company performance, and, according to the report, are supported by the numbers: “Of the CEOs leaving office, insiders have produced superior regionally market-adjusted shareholder returns in seven of the last 10 years, averaging 2.5 percent; outsider-generated returns, in comparison, have averaged 1.8 percent.”

Not surprisingly, insiders tend to last longer, too. Over the past decade, insiders held office an average of 7.9 years compared with a tenure of six years for the outsider. In nine of the past ten years, outsiders have been forced out of the CEO role at a rate higher than insiders.

The tendency towards planned succession is a product of rough economic times: “It’s no accident that planned successions have been increasing for the past three years on a global basis,” says the report, “In a time of economic upset and severely clouded visibility, boards have been loath to make sudden moves.”

The convergence of trends like preference for insider succession, a separation of the CEO/Chairman role and average turnover rate is met by what the report aptly calls “compression,” or a smaller window of time to produces results. The global mean tenure of departing CEOs has dropped from 8.1 years to 6.3 years during the past decade, according to the report.

While the report advises a swift implementation of new agendas and a distinguishable set of goals, it downplays the idea of “the first 100 days.” Neilson notes that though this is a “good period to show that action is, in fact, taking place, fundamental change does not happen in 100 days.” It’s important to take a realistic approach to the new position, especially when the transition is still in its seminal stages.

The report offers valuable advice to the incoming CEO in his new complex and increasingly delicate role. The team at Booz & Co. spoke with 14 current CEOs for some inside information about how they run their companies. What emerges from the interviews is valuable advice for any incoming CEO.

Read the full report with the interviews here.

Dudley was chosen because the crisis in the Gulf isn’t over, and it helps that he is an American, not a Brit. He was effective in Russia, where despite problems during his watch, BP to this day operates profitably and without incident. The board likely approves of the job he’s done since he took over the spill cleanup from Hayward. Yet, there is a strong argument to be made that he is a transitional CEO, not the leader of the future.

The Amoco Connection. Dudley was chosen over the heirs apparent to Hayward, BP insiders Andy Inglis, Ian Conn and Byron Grote. Since Dudley originally came from Amoco in the merger with BP 12 years ago, his appointment could signal BP’s return to a culture and asset strategy resembling Amoco’s. As a leader in safety, environmental standards and strong operating practices, Amoco operated accident-free upstream and downstream operations onshore U.S., in the Gulf of Mexico and around the world. Dudley knows the Amoco model and what needs to change within BP, but long-term tenure as CEO doesn’t necessarily follow.

Protecting the Insiders. Choosing Dudley could in fact be a smart move to protect Hayward’s assumed successors from the ongoing bad press and public uproar in the Gulf. Dudley might be able to get the company through its worst days and shield the younger insiders until it’s safe for one of them to take the helm. Dudley’s first significant operational role was in Russia; he doesn’t have the deep experience to elevate him above the competition.

Outside Influence. If the board is also wrestling with the idea of an outsider as its future CEO, Dudley buys them time. Who really wants to be CEO of BP right now? A real succession plan considers every possible contingency, especially the most terrifying (a reminder to all boards). The Gulf spill forces the board to rethink all options, a process that can’t be rushed. In the short term, BP needed an American and someone who could help change its culture. Dudley fit the bill. A year from now he might not.

But then again. Could Dudley conceivably keep his title? Can he gain respect in the Gulf? Can he convince regulators and politicians that BP will operate safely and responsibly? Can he protect the deepwater leases BP already owns and wants to operate around the world? Can he restore market confidence? Can he help BP deliver on a promise of no more mistakes, no spills, no violations, no excuses? It would take a Herculean effort by a gifted leader.

No one could wish Bob Dudley anything but great success. A terrible accident made him CEO, but don’t bet on him staying as CEO when the waters finally run clear in the Gulf of Mexico.

Keith Meyer is vice chairman and head of the Global CEO and Board Practice at CTPartners  based in Chicago. He has more than 20 years of experience advising Fortune 500 boards, CEOs and senior executive teams in all areas of corporate governance and board effectiveness best practices. Meyer was an executive at Exxon Mobil during the  Valdez oil spill in 1989.

“The lack of succession planning at some of the biggest public companies poses a serious threat to corporate health – especially as companies struggle toward a recovery,” says Stephen A. Miles, vice chairman at leadership advisory firm Heidrick & Struggles and a global expert on succession planning. “Not having a truly operational succession plan can have devastating consequences for companies – from tanking stock prices to serious regulatory and reputational impact.”

Stanford Graduate School of Business Professor David Larcker adds, “We found that this governance lapse stems primarily from a lack of focus: boards of directors just aren’t spending the time that is required to adequately prepare for a succession scenario.” Professor Larcker is a senior faculty member of the Rock Center for Corporate Governance, a joint initiative of Stanford Law School and the Stanford Graduate School of Business.

The 2010 Survey on CEO Succession Planning, conducted this spring, surveyed CEOs and directors at large- and mid-cap public companies in the U.S. and Canada, with 10% of respondents also from large private firms. Key findings from the survey include:

• While 69% of respondents think that a CEO successor needs to be “ready now” to step into the shoes of the departing CEO, only 54% are grooming an executive for this position. “This statistic, combined with the finding that more than half couldn’t name a new permanent CEO if the current chief became incapacitated tomorrow, is a total disconnect,” says Miles. “It’s hard to imagine that the CEO would be ‘ready now’ if he or she is not being groomed today.”
• A full 39% of respondents cited that they have “zero” viable internal candidates. “This points to a lack of talent management and not paying enough attention to your ‘bench,’” says Miles.
• On average, boards spend only 2 hours a year on CEO succession planning. “The full boards of respondents’ companies meet, on average, five times a year. Succession planning is discussed at only two of these meetings, at one hour apiece,” says Larcker. “The nominating and governance committee – who often take primary responsibility for succession planning – did not fare much better; respondents reported that only four hours of meeting time is typically devoted to this topic each year.”
• Only 50% have a written document detailing the skills required for the next CEO. Larcker thinks this seems rather low: “If nothing is written down, how do we know that the board really understands what these skills should be?”
• Seventy-one percent of internal candidates know they are in the formal talent development pool, but there is regular communication (typically yearly or bi-yearly) for only 50% of these internal candidates. “There is a large communication gap, which can cause retention issues,” says Miles. “Executives who don’t know they are even in the running to be CEO might be easily lured elsewhere, where they believe they have room for advancement.”
• The majority of firms – 65% – have not asked internal candidates whether they want the CEO job, or, if offered, whether they would accept. “Many firms simply assume that their top choices want the job, but that is not always the case,” says Miles. “More and more, we see executives who don’t want to be in the spotlight as the CEO, given the extreme public scrutiny associated with the position. Making this assumption without checking can cause real problems down the road.”
• Once viable internal candidates for the CEO job are identified, 38% of firms think that the external search should continue at the same pace. “This is a big mistake,” Miles warns. “Companies lose strong candidates when they keep the outside search open too long even though they have perfectly capable internal talent.”
• While 48% of respondents think they have an extremely strong or very strong understanding of the capabilities of internal candidates, only 19% have extremely or very well established external benchmarks to measure their skills against. “It is another disconnect between perception and reality,” says Larcker. “How do you know that a candidate is strong unless you compare him or her against the marketplace?”
• Only 50% of companies provide on-board or transition support for new CEOs. “This is the most important job at the company,” Larcker observes. “Not having the support in place for on-boarding the executive can put the entire organization on unstable ground.”

With companies still at risk due to their lack of succession planning, Miles and Larcker offer these top-line suggestions for boards:

1. Recognize that succession planning as practiced by most companies gives a false sense of security. “Even though boards have made progress in this area in the post-Sarbanes-Oxley world, most companies’ succession planning still isn’t even close to being good enough. Make sure that the board devotes meaningful time to this exercise, rather than simply checking off the box of a meeting agenda. Boards need to ask themselves: could they really name someone today, or is everyone in the succession plan always 1-3 years out from being viable?”
2. Focus on making succession plans operational. “Companies need to move from the ‘names in boxes’ approach that gives them a false sense of security to truly developing ‘viable’ candidates. Plans aren’t worth the paper they’re printed on unless there is a robust inside/outside process that ensures they are both developing and knowledgeable of all candidate pools – internal and external.”
3. Demand experience from board directors. “Regulators such as the SEC are recognizing the importance of a rigorous succession process, and firms should seek lead directors and/or nominating and governance committee chairs with sufficient experience in this area to ensure that it is adequately addressed. We are typically better at the things we have practiced before, and this is no place for someone to be ‘practicing’ for the first time.”
4. Pay attention to your bench. “Open lines of communication with potential internal candidates minimizes surprises down the road. When it comes time, you don’t want your #1 contender to turn down the job.”
5. Keep the “runners up” happy. “We see otherwise terrific executives who may not have been chosen as the CEO’s successor left hanging with no explanation. If you want to retain these executives, tell them why they weren’t chosen at this time and why they are still valuable to the company.”

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THE DIRECTOR’S GUIDE TO CEO SUCCESSION

Nothing Succeeds Like Succession

NACD Directorship’s inaugural Director’s Guide to CEO Succession includes the following articles on www.directorship.com:

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View PDF version of The Director’s Guide to CEO Succession

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But the Securities and Exchange Commission (SEC) Staff Bulletin—No. 14E (CF) to be precise—issued late last year may prove to be the game-changer required to elevate CEO succession planning to the position it deserves on the board’s list of priorities.

According to this guidance from the SEC, succession is no longer considered part of “ordinary business matters,” the details of which the board does not have to disclose. Instead, succession is now recognized as a fundamental duty, and part of the larger risk-management picture, with serious repercussions if it is not handled correctly. Further, the bulletin recommends greater transparency and shareholder disclosure about the management of succession risk “so that the company is not adversely affected due to a vacancy in leadership.” With access to this board-performance metric, how well boards handle succession is now increasingly a criterion that the investment community will have access to as they evaluate boards.

Addressing the Disconnect
According to Korn/Ferry International’s 34th Annual Board of Directors Study of Fortune 1000 organizations, 84 percent of directors surveyed believe the importance of having a CEO succession plan has increased, but only about half actually have one in place. Why the disconnect and, more importantly, what can be done to resolve it?

This sizable gap between awareness of the importance of succession planning and follow-through did not come as a great surprise to us. Our day-to-day conversations with CEOs and directors reinforce the fact that they get it: Succession planning is crucial; it will now be subject to greater outside scrutiny; adhering to best practices will protect the company’s reputation and value; and the board will be able to defend key leadership decisions, if need be, with solid data.

But the roadblock to implementation of succession planning persists on many boards, a result of several factors that must be addressed, including:

HABIT Succession at most companies was traditionally a process managed mainly by the CEO, with little involvement from the board.

HUMAN NATURE Succession entails dealing with real psychological factors, such as confronting one’s mortality and sensitive leadership choices where there are perceived “winners” and “losers.”

HOW-TO? Boards may not know where to start, what best practices are and how they can learn from boards that do it well.

Now is the time to take action and overcome whatever is standing in the way of implementing a succession practice. Because there is more than one approach, each succession plan needs to be thoughtfully adapted to a particular company and its board.

Start With a Vision
Effective succession planning starts with a mindset, rather than a checklist. It’s not simply about finding someone to replace the CEO, though that is of critical importance. Best-in-class boards start with a broad vision of succession and specific goals that stretch well beyond the boundaries of the corner office.

Properly implemented, succession is an ongoing leadership development process in which CEO succession is a subset. It is designed to provide talent options for key leadership positions at every level. Companies that achieve this goal not only score points in governance and investor circles, they attract the best talent when they become known as academies of leadership development.

Boards that master succession planning don’t have to worry about the prospect of a leadership crisis that could derail plans and progress, subject them to public criticism and potentially have long-term, negative repercussions for the company and shareholder value. They can instead focus on their business assured that regardless of circumstances— an emergency replacement required, short-timed departure or planned retirement—the bases are covered.

When the objective is to establish a world-class succession process, boards must first make succession a priority in word and deed. That means ensuring that succession-related discussions are on the board’s agenda at least once a quarter and, ideally and increasingly with many boards, at every board meeting. Because succession and leadership development, generally, are such complex, multi-faceted topics, board meetings often don’t provide adequate time to examine and discuss succession thoroughly. That is why most leading boards now have an annual or semi-annual off-site meeting devoted to succession discussions, much the way boards have focused on strategy.

ADDITIONAL STORIES IN THE DIRECTOR’S GUIDE TO CEO SUCCESSION:
The Ins and Outs of Successful CEO Transitions
Expect the Unexpected Before the Crisis Calls
Overcoming Resistance to Succession
Executive Compensation Programs Can Help or Hurt CEO Succession

Strategic Alignment
To design and implement a succession process that ensures the most capable leadership is guiding the company, the place to start is with the strategy. Aligning directors on the strategy is an important first step because succession, specifically the key competencies—and their order of priority—that will be required in the leadership team are driven by the strategy. A company guided by a strategy that details growth by acquisitions, for example, will seek very different qualities in a CEO than a company determined to focus on growing existing businesses. The former will seek a future CEO with M&A experience, including post-merger integration, while the latter will emphasize industry-specific experience and a successful track-record running operations.

One word of caution:  Never assume that a future CEO will be a carbon copy of the current CEO, no matter how effective a leader he or she has been. The key is to peer into the future via the strategy and create a profile for the CEO who will be best equipped to implement it.

In our experience, it is not unusual for directors on the same board to hold widely differing views of the strategy and what the company should focus on. An important part of the process is assessing where these views diverge and align, so that directors can come together as a team with a shared view of where the company is headed, as well as the resources required to get them there. Succession, like strategy, is forward-looking and dynamic. Shifts in the strategy resulting from changes in market conditions, economic factors, political circumstances, and a host of other variables, may necessitate shifts in the leadership competencies required.

Addressing Human Nature
Effective succession planning requires continual conversation and collaboration between the board and the CEO. Institutionalizing the process so it is regularly an agenda item enables the board to stay ahead of changing conditions that may affect the standing of potential candidates on a priority list. In addition, revisiting succession routinely will lessen some of the “human nature” concerns that can hinder succession planning, such as associations with mortality and internal competition. Handling succession in a transparent, matter-of-fact fashion—using a process that is perceived by all as fair—can ameliorate the personal sting felt by those being assessed. And establishing succession as a crucial but routine matter obviates the need for “the big talk” among directors and the CEO, increasing everyone’s focus and comfort level.

There are a couple of key areas in succession planning where it is wise, indeed considered a best practice, to engage a third party to work with the board.

One area in which outside, expert counsel is valuable is in helping the board to coalesce as a team around the strategy, which is crucial to effective succession planning and all of the work the board needs to accomplish as a close-knit group. Involving consultants experienced in assessing individual director views, highlighting areas of agreement and disagreement, and facilitating productive discussion on crucial areas of concern will help ensure that the board is focused on the right work at the right level and using its valuable time to good advantage. Concerns or questions about the strategy are far better aired in the appropriate forum, when they can be safely dealt with, than while making an important decision under time constraints, when differences can lead to a divided board and poor choices.

Partnering with a third party for the succession-planning process itself is also an established best practice with distinct advantages, akin to a governance “seal of approval.” With what was once considered the board’s own business now open for all to see, third-party involvement—including exposure to best practices—helps ensure a rigorous, objective process. This will be increasingly important to boards as the shareholder community evaluates how well succession planning is handled and adds that metric to other investment criteria. And in the event that leadership choices are challenged, boards will have the data to establish that they followed the right steps in executing the succession process.

Also critical, particularly to retain inside talent, is the perception that the process is fair and transparent at every turn. Even those who may be unhappy at being passed over for a desirable leadership position are more likely to accept decisions emerging from a process that they perceive as objective and based on fair selection criteria—and less likely to head for the exit.

Pull and Push
Developing and retaining talent—the leadership pipeline—is a critical element of the leadership development process. Hiring talent from the outside is always the back-up choice, unless the company is facing major change (such as a vastly different strategy or significant shifts in its industry) and those in line for succession do not possess needed skills and experience. Even when insiders top the list of successors, however, gaining an outside perspective is crucial to developing the best talent and making the best choices.

Leading boards often gain that external view with the help of a third party who can provide a deep and broad perspective across industries on best practices for succession. A third party will craft a benchmarking process that can be difficult for companies to undertake on their own on a regular basis. Benchmarking data enables companies to assess their own talent against the best outside talent, employing whatever screens they wish, including industry, company size and others. The benchmarking data can also serve as a useful check on succession planning, suggesting gaps in candidates’ skills and experience that will need to be filled if they are to succeed to particular positions.

Boards are increasingly feeling the push-pull of implementing a thoughtfully designed, well-executed succession process. The push? The ability of the investing public to now view and “grade” a process which, if there even was one, was historically handled behind closed doors. No board wants to be scrutinized only to come up short and be exposed as lacking in the leadership development arena. Ensuring a steady flow of capable leadership is essential and safeguards a company’s future by quelling any investor uncertainty about proper stewardship.

But the pull is just as important as the push. More boards are now focused on succession planning, not just because they have to do it, but because they recognize the advantages they gain, long-term, when they get it right. Demonstrating a rigorous succession process, based on established best practices, can have a positive impact on company reputation and value. That can translate into elevating the company’s status as a desirable place to invest as well as an attractive place for talented people to build a career.It is not unusual for directors on the same board to hold widely differing views of the strategy and what the company should focus on. An important part of the process is assessing where these views diverge and align.

Joe Griesedieck is vice chairman and managing director of Board and CEO Services at Korn/Ferry International.

NACD Directorship: How does a board create the right CEO succession process—what should boards enact and avoid?

Joe Griesedieck: We encourage boards to try to look internally for successors. Don’t go outside if you don’t have to. It’s more risky. Sometimes it’s necessary, but for the most part, if boards get out in front of this three or four years in advance, most often they can get to know the internal candidates a lot better than they know them today.

Richard Daly: The first thing I did was poll individual directors and ask them if they could share with me a time when they felt good at the end of a succession process. None could say that they participated in a succession process that they felt really good about. At Broadridge, I brought an external advisor in, not to run a CEO succession process, but to advise us on what a good process would look like. With the benefit of outsiders, we ranked the talent we had. I went through all the testing and shared the results with every leader tested and the entire board. We were able to see what we look like right now with complete transparency between management and the board.

Margaret Foran: You can’t just import something and think it’s going to work for your organization. You’ve got a different board with different experiences, so you’re going in a different direction. The process really has to be tailored from the very beginning. I think it’s critical to continually have those conversations early on.

Bonnie Hill: I agree that having internal candidates for CEO succession is preferable, but if there are no internal candidates, hiring individuals who can be future candidates is one strategy. If the board does not see viable candidates that can step in on an emergency basis, that’s a concern and there need to be some internal changes.

NACD Directorship: How should a board approach the succession process?

Nels Olson: There are boards that look at CEO succession as a singular event, but should look at it more holistically. Most likely, the successor is internal, which means you have a position that’s going to be open on the senior team. You have to look at not just the CEO, but down a rung or two.

Philip Lochner: Boards tend to defer to successful CEOs and successful CEOs tend to dominate the process. I think boards sometimes fail to ask whether the CEO’s recommendation is really the right person to lead the company forward. I’m a big believer in going outside and benchmarking—even if you have viable internal candidates.

Robert Friedman: I think it is less about CEO succession than it really is about understanding the package of management. It’s not about an individual, particularly depending on the category.

Hill: If a CEO can give you only one potential successor, that in and of itself is a challenge. One plan for developing successors is to alternate them through different senior-level positions—I’ve seen it work. It doesn’t work each time, but the process gives the management team a more well-rounded experience.

Daly: Picking a CEO, and then succession for the CEO, are jobs one and two for boards. Bringing [outside] professionals in not only gets the board to a comfort level that they deserve to be at, but they also can check the boxes with brutal candor and transparency.

ADDITIONAL STORIES IN THE DIRECTOR’S GUIDE TO CEO SUCCESSION:
Nothing Succeeds Like Succession
Expect the Unexpected Before the Crisis Calls
Overcoming Resistance to Succession
Executive Compensation Programs Can Help or Hurt CEO Succession

NACD Directorship: How can a board reach out beyond board meetings?

Hill: At Home Depot, we’ve structured dinners around specific departments. For example, we may have the marketing team for dinner and
one or two directors at each table. The discussion at each table is different; however, the subject matter is marketing. Having the board interface with associates from within the same department provides good feedback for board discussions, as well as a deeper understanding of the department involved.

Kenneth Kopelman: The day before every board meeting, in the 60 minutes after committee meetings are done but before the board dinner starts, each of our directors sits down for a one-on-one with a senior person.These sessions are completely unscripted, with no agenda, no PowerPoint, nothing. Within the space of a year, each director gets to meet six to eight senior managers, who may one day be part of the CEO succession plan, in a fairly intimate way. Watching an executive or a team present inside the boardroom—when the full board and the CEO are there—can be a lot different than sitting in their office, with no required subject matter, no agenda. It can be very high-quality time in terms of sizing them up and getting to know them.

NACD Directorship: How should boards manage second- and third-choice candidates?

Ann Reynolds: When it’s a horse race for the CEOship, two or three top-performing people in the company are told that, depending on how they perform and how they interview with the board, one of them will be anointed. Having experienced it, this is truly a horrible process, and should never be repeated, if at all possible.

Foran: It may work in companies such as GE where you have separate businesses and people are really not interacting. If you’ve got one business, there are some major challenges.

Steve Mader: It creates winners and losers in the eyes of the rest of the organization as well. So everybody’s watching the competition, it’s a pronounced competition and it’s an announced competition.

NACD Directorship: How does age play into selecting a candidate?

Lochner:If the person is put into the CEO’s job at say, age 50, their personality isn’t going to change, their skill set isn’t going to change by much. So it’s a matter of understanding that at the outset and then being able to fill in if somebody’s not strong on the financial side. Maybe you need a better CFO. It’s a package deal in some sense.

Reynolds: You generally don’t get the exact date that he or she will retire—even if they are a competent CEO—because the minute they announce that, they start to feel their power dissipate. So you’ve got this timing difficulty, and if people are aspiring to the CEOship, and some of them are very good, you want to hold onto them.

NACD Directorship: How should directors perceive their efforts in planning for a successor?

Reynolds: What’s necessary is a great deal of patience and a back-and-forth exchange between board members that has its grounding in the fact that you have tried really hard over the years to relate to fellow board members, so you have respect for them.

Ilene Lang: Companies should not be on hold, waiting for the board meeting when the decision [on succession] is to be made. We’ve seen recent examples where company transitions were smoother because there was transparency. The lesson here is that the company benefits from a collaborative process, not an internal competitive one with a win-ner-takes-all and a losers-totally-out mindset.

The best candidates come from within and the board’s knowledge of them in roles outside the boardroom.

The principal purpose of an emergency-succession plan is to ensure that decisions about successor appointments are made in advance of a significant unexpected event, such as the severe illness, death, resignation or termination of the chief executive officer or other critical members of senior management. Given the potential that these unexpected events could have an adverse impact on a company’s stock price, ongoing operations and short-term and long-term prospects, the board of directors should consider establishing defined lines of succession that can be quickly implemented and publicly disclosed when necessary.

Emergency vs. Long Term
An emergency succession plan may be markedly different from the company’s long-term succession plan—for example, different executive officers or directors may be tapped to succeed a chief executive officer or other executive officers on an interim basis, because an effective emergency-succession plan is designed to assure a seamless transition of management during a crisis situation, rather than seeking to meet long-term strategic objectives. As a result, the board of directors should carefully consider the design and operation of an effective emergency-succession plan well in advance of ever needing to implement the plan, and the board should then review the plan at least annually and more frequently when there is an orderly change in management or in the event of some significant event (e.g., the diagnosis of a chief executive officer’s serious illness).Several key features of effective emergency-succession plans include:

-Responsibility for the emergency-succession plan is often vested with a committee of the board, such as the compensation committee or the nominating and corporate governance committee. While the committee is deemed responsible for the plan, the full board should remain responsible for any appointments (including permanent or interim appointments) that are made.

-An effective emergency-succession plan contemplates not only succession in the event of unexpected events such as death, disability and resignation or removal, but also succession in the event of temporary, unplanned absences (which may be defined as exceeding a specific time period, e.g., six months), such as when an individual expects to be out of the office on an extended basis, for example, due to a treatable illness.

-A plan may provide that, unless otherwise specified by the board of directors, all appointments will be made on an interim basis, so as to preserve the flexibility for the board of directors to make permanent appointments at the time of the unexpected event, particularly in situations where the established lines of succession are consistent with long-term succession plans.

-A plan should provide that appointments made by the board of directors occur within a very short time period in order to minimize the amount of uncertainty associated with the succession event. A time period of two business days after the appropriate committee receives notice of the unexpected event may be reasonable, although a longer or shorter period may be appropriate, depending on a company’s individual circumstances.

Generally, plans will afford the board discretion to ascertain the term of service for any interim appointees, the scope of authority of successors, and the compensation for successors under the emergency succession plan and other company policies. In this regard, the board should consider when implementing an emergency-succession plan what other policies could be triggered by an unexpected event, and how those policies would work together with the succession plan.

While many plans focus on the succession of the CEO, it may also be appropriate to provide in the plan for the succession of other executive officers, particularly when other specified executive officers (such as the president or CFO) are slated to succeed the individual serving as the chief executive.

To preserve maximum flexibility upon the occurrence of a significant unexpected event, it is often appropriate to identify two or three executive officers as successors, to address the potential that more than one executive officer could be subject to the unexpected occurrence at one time.

ADDITIONAL STORIES IN THE DIRECTOR’S GUIDE TO CEO SUCCESSION:
Nothing Succeeds Like Succession
The Ins and Outs of Successful CEO Transitions
Overcoming Resistance to Succession
Executive Compensation Programs Can Help or Hurt CEO Succession

Being Flexible
While an effective emergency succession plan is designed to provide an important level of certainty for the board of directors when a crisis arises, it is critically important that the board preserve flexibility to adapt its actions with respect to management succession to the particular situation that the board faces at the time of crisis. Even with an emergency-succession plan in place, the board of directors will need to look at the overall circumstances arising in connection with the unexpected event, and should carefully consider the planned succession. For example, a board could be forced to terminate a CEO due to an indictment; the emergency-succession plan provides that the CFO is the CEO’s designated successor. Based on potential concerns that the CFO could be involved in the same conduct that gave rise to the CEO’s indictment and termination, the board may need to identify another replacement outside of the succession plan to avoid any potential adverse legal or other consequences in connection with the appointment.

What the Public Should Know
It is recommended that an emergency-succession plan remain confidential, with access limited to the board and only those employees who have a need to know in the event of an unexpected event. While there is no requirement to publicly disclose the terms of an emergency succession plan, a company may want to consider revising its corporate governance guidelines and proxy-statement disclosures (if any) to note the existence of the plan, so investors can be assured that the board is attentive to this critical issue.

Upon the occurrence of an unexpected event and the appointment of a successor under the plan, the change in CEO and the change in any other specified senior officers would need to be disclosed quickly by filing a Form 8- K with the Securities and Exchange Commision. Companies may also want to issue a press release or conduct a conference call to address the unexpected event and the related management succession, considering any potential Regulation FD and investor relations concerns.

An effective emergency-succession plan is necessary to avoid the potential confusion and delay that can result when an unexpected event forces a change in management. While a company couldadopt a standalone emergency-succession plan, it is best to consider emergency-succession issues in the context of the company’s overall consideration of management succession.

Once an effective plan is in place, the board must be ready to quickly and carefully evaluate the circumstances around the unexpected occurrence to determine whether the pre-established succession plan remains in the best interests of the company and its shareholders.

For maximum flexibility, identify two or three executive officers as successors, to address the potential that more than one executive officer could be subject to the unexpected occurrence at one time.

David Lynn is a co-chair of Morrison Foerster’s Public Companies and Securities Practice in Washington, D.C.

Scenario #2: What about an entrenched CEO, perhaps a founder, who is resistant to any mention of a successor?
This is the trickiest scenario of them all. It really comes down to the lead director having a discreet conversation, away from the rest of the board, with the sitting CEO, stressing the importance of succession planning, and frankly showing some examples of some that haven’t gone well. It is important to discuss SEC Bulletin Section 14E and the financial-regulation rule about transparency and succession planning and the need to have a plan in place. There are enough things out there that could be a catalyst to the conversation, which were very difficult in the past, and a little fear can be a powerful motivator.

Scenario #3: The distracted board: With so many short-term issues, particularly during an economic downturn, how should the board prioritize longer-term issues?
Every company has a significant number of issues that it is dealing with at any given board meeting. I think it’s up to the lead director or the head of the nominating committee to make sure succession is at the top of the agenda, and that periodic off-site meetings are planned to focus exclusively on succession. Succession planning and picking the chief executive is the number one job of the board. Regardless of all other issues that are in front of a board at any given time, making sure there is a plan in place is critical. There’s not nearly as much push back as there had been in the past about this because directors recognize the importance of succession.

Scenario #4: The inert or complacent board that believes its longstanding succession plan is sound: How do you test your current plan and how often is sufficient?
You need to make sure that your succession plan is revisited at least on an annual basis and that you have an up-to-date game plan, which anticipates common scenarios. In many cases, you need to review your current strategy at least twice a year. So the nominating committee has to make it part of its agenda and use board meetings as an opportunity to get to know the other potential

internal candidates. Directors need to be exposed to potential candidates both at the board meetings and outside of them, whether it’s through presentations or special assignments given to them, as well as social situations. These interactions allow for a broader perspective on those candidates and allows the board to get to know some of the potential candidates.

Scenario #5: The stricken CEO: What’s the best interim solution if no succession plan is in place?
The most likely scenario is you have an interim person, whether that’s the chairman of the board or someone on the senior team who could step in while this is being examined, but it’s most useful to use someone during this traumatic situation who has some familiarity with the company, is respected and will have a firm hand on the tiller. It’s common for the chairman to step in while a search is being conducted. The chief concern is to ensure that the company is communicating to the investment community  that the board did not drop the ball and strong, capable leadership is in place.

Nels Olson is managing director, Eastern Region, for Korn/Ferry International and senior client partner with the Board & CEO Services practice.

ADDITIONAL COVERAGE IN THE DIRECTOR’S GUIDE TO CEO SUCCESSION:
Nothing Succeeds Like Succession
The Ins and Outs of Successful CEO Transitions
Expect the Unexpected Before the Crisis Calls
Executive Compensation Programs Can Help or Hurt CEO Succession

-The relationship of CEO pay to compensation for other named executive officers (NEOs)

-Compensation for likely internal CEO candidates before and after succession

Keeping CEO and NEO Pay Proportionate
There has been a lot of discussion in activist circles regarding the proper ratio of CEO compensation to that of the average worker, to the #2 executive or to the other NEOs. It has been argued that when CEO pay is stratified above the rest of the executive team, it leads to dysfunction and inefficiency at shareholder expense. Critics further maintain that a disproportionate pay relationship among corporate leaders is unfair and a likely symptom of poor governance. While such concerns are in part socialminded, they are relevant to CEO succession.

The gap between the pay of the CEO and other NEOs varies by industry and other circumstances related to talent strategy. For example, CEOs of broadcast and retail companies usually have annualized pay packages that, when the value of equity grants is included, may be three to four times higher than those of other NEOs. Acquisitive companies and others engaged in a high level of strategic transactions may also have very highly paid CEOs relative to other top managers. Founder CEOs also can have high pay levels. In some cases, very high levels of performance of the CEO can justify such pay disparity. Does “rock star” industry talent really get more deals made and doors opened? Possibly. But whether true or not, such a compensation model presents a serious dilemma in terms of succession planning.

Stratified pay may occur because the CEO is paid extremely well against the market, or because the other NEOs are paid relatively poorly, or a combination of both. When the other NEOs are paid belowmarket, chances are the board has come to overly rely on the incumbent CEO to run the company and has allowed key operational and functional decision making normally vested in other NEOs to be controlled by the CEO.

The likelihood of an internal succession in such a scenario is lower. It will be difficult for any other senior officer to function at the level of the highly controlling incumbent or to reassure external stakeholders that company stewardship will be transferred with calm and continuity. Because the “switching cost” for CEO succession will be relatively high, the boardmay give further deference to the incumbent CEO and exacerbate the pay stratification.

Sooner or later, organizations in these circumstances will face serious consequences. In one extreme example, the founder/CEO of a small-cap information-services company was paid in the top decile of the market, while every other key C-suite officer was paid near the bottom quartile. Moreover, the CEO’s recent self-evaluation focused on his hands-on leadership in key marketing initiatives, his personal involvement in executing a recent acquisition and his indispensable role in securing a large client relationship. The compensation committee, after years of acquiescence in this unbalanced leadership model, finally realized its predicament – that the CEO was effectively serving the roles of chief marketing officer, chief financial officer and top salesman.

Compensation for Internal Candidates
Along with the negative impact of stratified CEO pay on the readiness of internal candidates, promoting a “tournament” approach to executive succession hurts retention of top candidates because their career success is increasingly defined by the pursuit of the chief executive’s office. Not attaining that office is seen as failure, or at least a critical stumble in their career progression. In such circumstances, worthy candidates are more likely to pursue outside job opportunities.

Companies can increase the likelihood of holding key talent through a leadership transition by taking a proactive approach to executive compensation, including the following actions: First, ensure that NEOs are paid not only appropriately against the market, but consistent with internal equity considerations. In other words, the company should generously compensate long-tenured executives who have proven they are truly exceptional in their roles, or are key “utility” players who ably fill varied roles as needed. During a period of stable CEO leadership and low executive turnover, boards may assume these executives really don’t need to be paid so well. But taking a proactive approach that calls for fair, and not just required, compensation can make a big difference in the response of an internal CEO candidate who ends up a runner-up.

Recruiters will confirm that dissatisfaction with level of pay is rarely the primary reason that senior executives leave a company—it is just symptomatic of other issues. When executives believe their value is truly recognized (not just with compensation, but by increasing board interaction, new leadership responsibilities, etc), they are less likely to view getting the CEO’s job as the only worthwhile step in their career. Throwing a lot of money at a CEO runner-up after the fact will be quite costly and ultimately will not improve the likelihood of long-term retention under new leadership. In fact, this action may just delay turnover, be more costly to the company in the interim and potentially create a difficult CEO transition.

Second, impose a stiff price for voluntary separation. That can be done by tying up more of total executive compensation in long-term incentives with extended vesting requirements (e.g., four or five years). Additionally, ensure that long-term insurance policy cycles overlap, keeping a perpetual payout opportunity just “over the horizon.” Once it is clear which internal candidates will not be getting the top job, act proactively—before the succession decision is public—and consider providing special recognition grants of equity with long-term vesting to runners-up.

It should be noted that these actions assume it is in the company’s interest to retain the runners-up. Naturally, any good succession plan must contemplate leadership dynamics and operational needs. If a high-performing executive is passed over and the board does not believe this executive could effectively perform under the new CEO, the board should not be afraid to effectuate an orderly and amicable departure.

ADDITIONAL STORIES IN THE DIRECTOR’S GUIDE TO CEO SUCCESSION:
Nothing Succeeds Like Succession
The Ins and Outs of Successful CEO Transitions
Expect the Unexpected Before the Crisis Calls
Overcoming Resistance to Succession

Third, make leadership and succession planning an explicit element of executive evaluation, especially for the CEO. Directors should make clear that CEO performance is not just measured by stock price and earnings growth, but requires performance in key leadership areas, such as putting into place a detailed, robust succession plan. That kind of “soft” performance issue too often gets cursory consideration in pay decisions. But when directors contemplate the consequences of a disorderly succession, the compensation implications become easier to take seriously. As for other executives, emphasizing the importance of their own succession signals the prospect of other new roles, such as lateral assignments, that enhance their executive experience.

Thoughtful and proactive executive compensation policies are important to CEO succession. Directors should strive to ensure balance in CEO/NEO compensation and be vigilant in ensuring that all its top executive talent is fully recognized for their ongoing contributions to the company’s success with long-term, extended vesting compensation. Finally, directors should make leadership and succession planning a high priority, with meaningful compensation implications, especially for the CEO. Ultimately, a strong succession-planning process helps
prepare the entire organization to handle high-level departures when they inevitably occur.

Matt Turner is a managing director in the Chicago office of Pearl Meyer & Partners, an independent compensation consultancy.