More than any other company move, CEO successions form headlines, providing an important indication of an organization’s viability. Executive leadership changes have a profound effect not only on public perception, but on the opinion of other audiences as well: namely shareholders, the business press, competitors, and potential customers or clients.
Regardless of their reason, top leadership changes are always material events for a company and the 24/7 news cycle reacts appropriately, immediately bringing them to the public’s attention. In a business environment characterized by an intense emphasis on transparency and many different ways to communicate news, strategic, planned communication of CEO succession plans for both the public and shareholders is of vital importance to a company’s viability.
In 2009, the SEC thrust CEO succession planning – or lack thereof – into the view of shareholders, reversing its position that requests for succession plan disclosure could be excluded from proxy statements. This was not the monotonous regulatory change it may seem at first blush; the result is that CEO succession planning is now far more of a public event. And for good reason: Poorly planned successions can lead to dramatic drops in stock price. In late 2010, when CEO Mark Hurd exited Hewlett-Packard, the company’s stock price dropped more than 9 percent.
Though this succession resulted from a scandal, having a plan in place should still have been a top priority for the company. Proper communication with the public and a strong succession strategy would have prevented public anxiety over how top leadership would react to the naming of Cathie Lesjak as CEO. Though private companies do not face the same regulatory and market pressures to disclose facts, succession planning is valuable for them as well, allowing them to mitigate the risk of uncertainty over who will take the top post if a crisis forces the CEO to step down.
For companies who have an older CEO or one who has been facing medical difficulties, a CEO succession plan is a crucial part of the company’s overall business plan. Some otherwise transparent companies lack adequate CEO succession planning. Berkshire Hathaway recently insisted that their board of directors update shareholders annually on the status of CEO Warren Buffett’s successor to make sure the firm follows a plan when naming an insider. In Buffett’s annual letter to shareholders on February 25, he did not identify the person who would be taking his place and also did not specify an appropriate timeline.
Berkshire isn’t alone. Sixty-one percent of publicly traded companies don’t have a CEO-replacement plan, according to Korn/Ferry International, an executive recruiting firm. The reasons given for this lack of clarity: CEO turnover is a relatively rare event. Boards are often surprised when there is a leadership change and have not fully prepared. Further, increased regulation only goes so far to encourage planning. Though boards may have identified an appropriate candidate to assuage regulators, the gap between a plan on paper and one that is actually operational is vast.
Announcing a top leadership change at a company affects many groups of stakeholders. Having a plan in place is becoming increasingly essential as new regulations encourage disclosure. But without properly communicating that plan, uncertainty and even crisis situations can result.