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Sep 07, 2015

Looking beyond risk management in succession planning

Companies need to see opportunities in succession planning: mapping leadership, operating skills for each executive role

A feature in the August 24 issue of New York about three potential candidates to be the next publisher of the New York Times got me thinking about some of the challenges of succession planning.

As the untimely death of SurveyMonkey CEO Dave Goldberg in early May showed, some companies are woefully unprepared when it comes to CEO succession. Given that Goldberg was just 47 years old and had only recently steered the tech company into a new stage of accelerated growth, there was little reason to suspect he would leave the firm any time soon. But that’s the point of succession planning and precisely why it’s a central element in corporate governance: to prevent a company from being blindsided by an unexpected event that can derail its business strategy and test the confidence of investors.

Zander Lurie, a friend of Goldberg’s and an executive at GoPro, the sports camera company, was quickly brought in as temporary executive chairman while the board searched for a new CEO. Lurie attributed the ‘broad strokes’ succession plan that SurveyMonkey’s board had in the event of Goldberg’s death to ‘the fast-growing nature of the company’ and ‘human nature’, in a New York Times article on June 21. Lurie told the Times he hadn’t spoken of the need for succession planning to GoPro founder and CEO Nick Woodman, who is only 38, because ‘it’s a weird conversation to have with somebody.’

Despite the lip service companies pay to ‘people being our most important assets’, most aren’t doing a good job of assessing and developing talent with the idea of cultivating future leaders, says David Larcker, a senior faculty member at Stanford University’s Rock Center for Corporate Governance. ‘Boards need to up their game and really deal with that part of risk management,’ he adds.  

Notwithstanding SurveyMonkey’s circumstances, Larcker believes most companies have given thought to an emergency candidate who can take over if something happens to the CEO. Where boards fall short, he thinks, is in long-term planning for a natural transition in which they consider far in advance who will be tapped to take over and preparing potential candidates to step up. ‘[At] a lot of companies, if something bad happens, it takes them a long time to figure this out, which basically tells you they don’t have a real succession plan in place,’ he notes.

Larcker co-authored a research article, ‘Seven myths of CEO succession’, part of the Corporate Governance Research Initiative (CGRI), which can be found on the faculty research website of the Stanford Graduate School of Business. The website is a trove of research and insights into a variety of issues facing companies and boards, including CEO succession, executive compensation, board governance and proxy voting, and Larcker would like more general counsel and corporate secretaries to be aware of it.  

Myth #3 is that the CEO should pick a successor, which the article rejects by explaining that it’s the board, as the shareholders’ representative, that has a fiduciary duty to make this decision and that the CEO doesn’t share the board’s perspective on the company. ‘The board is responsible for future performance and strategy, while the CEO has devised the current strategy and has a vested interest in its continuance,’ the article states. ‘The board needs to determine whether future operating conditions will require a change in direction and a leader with a different perspective and skill set from the current CEO.’ In addition, CEOs don’t always evaluate talent objectively and may have built up biases and preferences over an extended period of working closely with certain people, it notes.

Myth #4 claims that succession is primarily a ‘risk management’ issue, and the article says that although failure to plan for a leadership change exposes a company to downside risk, succession planning should also be seen as an ‘opportunity to build (and not just preserve) value. Successful companies map their succession plans to a forward-looking view of the organization’, identifying critical positions such as senior management team members and lower management level positions, and determining leadership and operating skills for each position while benchmarking every executive against these skills. ‘At its best, succession planning is as much success-oriented as risk-oriented,’ the article points out.

David Bogoslaw

Associate Editor and Online features producer for Corporate Secretary