CEO succession planning: Finally at the center stage of the boardroom

Abstract

Few would question the importance of CEO succes-sion in a company’s success, but many companiesdo not have a plan to manage CEO succession. Forinstance, a 2009 survey by the National Associationof Corporate Directors revealed that 43% ofU.S. public companies had no formal CEO succes-sion plan and 61% had no emergency CEO replace-ment plan (Miles & Bennett, 2009). Even amongfirms that do have succession plans, most of themare dissatisfied with their plans. For example, theCorporate Leadership Council, a human-resourceresearch firm, found that only 20% of the 276large firms they surveyed in 2004 were satisfiedwith their top-management succession processes(Charan, 2005). The absence of a CEO successionplan can put a firm at enormous risk. One recentexample of a succession-induced crisis is Bank ofAmerica. When the former CEO Ken Lewis an-nounced on October 1, 2009 his intention to leaveby the end of 2009, Bank of America did not have asuccession plan in place. Between September 30,2009 and December 15, 2009, the period duringwhich the firm searched for a successor to Lewis,its stock fell 10% while the Dow Jones IndustrialAveragerose7.6%(Kassenaar, 2010).The Securities and Exchange Commission’s Divi-sion of Corporate Finance Legal Bulletin 14E, re-leased on October 27, 2009, holds boards moredirectly responsible for succession planning. Thebulletin is also likely to empower shareholderswho want boards to be more transparent in relationto CEO succession planning. The bulletin explicatesthat:One of the board’s key functions is to providefor succession planning so that the company isnot adversely affected due to a vacancy inleadership. Recent events have underscoredthe importance of this board function to thegovernance of the corporation. We now recog-nize that CEO succession planning raises a sig-nificant policy issue regarding the governanceof the corporation that transcends the day-to-day business matters of managing the work-force. (Miles & Bennett, 2009)A likely direct outcome of this change in the SEC’spositionisthatwemayseeanincreasingproportionof inside promotions to the CEO position. Thisrepresents a reversal of the trend in the past twodecades whereby companies have increasinglyfavored outside hires for the CEO position. In thisarticle, we will identify the reasons underlyingcompanies’ common quest for outside CEOs, com-pare the relative advantages and disadvantages ofinside versus outside CEO successions, and offer