Prominent CEO Resignations Prompt Succession Policy Review

CEO succession planning has become a hot topic of discussion in the past few weeks, particularly as the media heavily covers high-profile retirements and resignations. Indeed, according to Equilar data, there have been 62 CEO transitions either that have occurred or will occur before year-end 2016 at S&P 500 companies alone. Already there have been announcements for 13 more in 2017.

Among those, both Starbucks’ CEO Howard Schultz and Coca-Cola’s CEO Muhtar Kent have announced that they will be stepping down from their leading roles. These examples bring up a topic that all companies need to consider: Is there a proper CEO succession plan in place?

A change in CEO is arguably the biggest transition a company can experience and should be continually discussed in the boardroom preparation for an expected or unexpected change. Who will the new leader be? How will the company retain top talent, especially if they are not chosen for the role? Should this new leader be promoted from within or hired from the outside?

According to the Equilar report Executive Compensation and Governance Outlook 2017, featuring commentary by Hogan Lovells and Labrador, only 3.3% of S&P 500 companies included a well-disclosed CEO succession plan in their annual proxy, meaning that there was discussion of specific details such as succession timelines and successor criteria. While 3.3% may seem low, these specific details have seen an upward trend, rising from 1.9% in 2012. While most companies are not dedicating an entire section of their filings to a conversation on CEO succession, 36.3% of S&P 500 companies mentioned their attention to the matter of succession planning in 2016 proxies.

equilar-ceo-succession-plan-disclosure
Source: Equilar

“Shareholders have a deep interest in how their portfolio companies prepare to handle major events like a CEO transition,” said Belen Gomez, Director of Research and Board Intelligence Services at Equilar in a press release. “However, they must also understand that strategic, competitive and talent retention issues may take precedent over full transparency. There needs to be sufficient information to ease shareholder anxiety around the issue—that they have a thoughtful plan in place—without compromising the strategic position of the company.”

Starbucks provides an example of a company that specifically discusses their logistics for CEO succession planning. In its proxy filed January 25, 2016 (p. 17), the company noted that Mr. Schultz provides an annual review that lists out logistical strategies for both emergency and ordinary succession plans.

CEO Succession Planning

Mr. Schultz provides an annual review to the board of directors assessing the members of the Senior Leadership Team and their potential to succeed. This review, which is developed in consultation with our executive vice president, chief Partner Resources officer, and the chair of our Compensation Committee, includes a discussion about development plans for the Company’s executive officers and senior officers to help prepare them for future succession and contingency plans in the event of our ceo’s termination of employment with Starbucks for any reason (including death or disability) as well as our ceo’s recommendation to his successor. The full board has the primary responsibility to develop succession plans for the CEO position.

There is no doubt that CEO succession planning is an important topic of focus, as investors want to know that the company will continue to function even in the event of an unexpected transition. As companies continue engaging with shareholders, the trend of discussing succession planning may become even more common in annual proxies so as to instill confidence in investors that the company is prepared and has a clear strategy for the future.

For more information on this topic, including company disclosure examples from public filings, Equilar clients may download Executive Compensation and Governance Outlook 2017 by clicking here. Non-clients may request a complimentary report by filling out the form.

For more information on Equilar research and data analysis, please contact Dan Marcec, Director of Content & Communications at dmarcec@equilar.com. Hannah Dumas, research analyst, contributed to this post. 

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