Steve Jobs' Resignation Highlights the Importance of Succession Plans

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Steve Jobs' Resignation Highlights the Importance of Succession Plans

Steve Jobs' Resignation Highlights the Importance of Succession Plans
As Apple CEO Steve Jobs steps down from his iThrone, boards of directors at companies big and small might want to heed this as a timely reminder and ask: Do we have a workable succession plan in place?


Between Apple CEO Steve Jobs stepping down from his iThrone and news of former Vice President Dick Cheney's top-secret resignation letter, companies big and small might want to heed these timely reminders and ask: Do we have a succession plan in place?

Not least because, according to some major studies in recent years, many companies have no such plan.

Identifying the next round of leadership is a matter of good governance and risk management, says David Larcker, a professor at the Graduate School of Business at Stanford University.

"One of the key tasks of the board [of directors] is to ensure they have the right people in place," Larcker explains. Even if boards are reticent about sharing the proprietary information involved in a succession—as has been mentioned in the closely held plan to hand off Apple's top spot from Jobs to his COO, Tim Cook—they "have to convey to shareholders that they're on top of this."

On the risk-management side, says Larcker, the question is, "What is it I can do to mitigate undesirable things happening to the organization?" He adds, "These are tough decisions." Planning for an emergency, an accident, or a potential executive ouster are not the most comfortable subjects for anyone.

But done well, a succession plan can gird a company when misfortune strikes. McDonald's is credited with having a plan that served them well when two of their CEOs died in the course of a single year. And yet, the company proceeded "without a hitch" says Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.

At the other end of the spectrum, Bank of America's board stirred up shareholder doubt when former CEO Kenneth Lewis's vacated spot remained empty for three months - which finance professor Tony Plath described to USA Today as the "executive search from hell."

Although there are no formal regulations that govern succession plans, the Sarbanes-Oxley Act of 2002 has, in general, placed more responsibilities on boards to protect shareholders, says attorney Arn Rubinoff, an adjunct professor in the College of Management at Georgia Tech. If something were to happen to a "dynamic, critical CEO"—a la Jobs—and the board had not planned accordingly, shareholders could potentially have a cause for action, Rubinoff says.

"Anyone could die. Anything could happen," says Rubinoff. Without a set plan, an executive search could take months, upending stock value in the process.

According to John J. Barry, leader of the Center for Board Governance at PricewaterhouseCoopers, (seen in this online video interview) boards sometimes delay succession planning because of the internal politics involved, because the process can be seen as disloyal to the current CEO, and because it's flat-out time consuming.

It doesn't have to be that way. A number of best practices can help, says Steven R. Walker, general counsel, secretary, and director of the Board Advisory Series at the National Association of Corporate Directors (NACD). Among NACD's suggestions that Walker endorses:
•Companies should have a succession plan in place three to five years in advance of a transition.
•Boards should be clear on the company's vision and future strategic needs as they go about developing selection criteria for leadership candidates.
•Implement a formal assessment process to objectively assess candidates and identify development needs.
•Create opportunities for board members to interact with internal candidates in an ongoing manner.
•Stage the succession in an orderly manner by placing candidates in a series of expanding roles.
•Have a comprehensive emergency plan on hand. The board should review this once a year.

As for who makes the best successor, a study published in the Harvard Business Review last year makes the case that, "whether a company chose a CEO from inside or outside did matter—but whether the choice turned out to be wise depended mostly on the health and competitive position of the company at the time of succession."


NYLJ-Catherine Dunn
Corporate Counsel
August 26, 2011