Communicating CEO succession plans to institutional investors does not have to be complicated. Generally speaking, transparency around your CEO succession process is a good thing. This should not be confused with providing investors with a play-by-play update (I would not recommend the latter). Here’s a high-level outline that may be useful for CEOs and Board members:
Define the Succession Process Timeline (share publicly): For example:
“John Doe, CEO of Company XYZ will become Executive Chairman on January 1st 2019. XYZ will name a new CEO during Q4 2018.”
We chose the word “during” as opposed to “by” because the latter is too open-ended and invites investors to repeatedly ask “when”. “During” provides a bit of air cover around the timing question. You can always move the date forward and name a CEO early. Don’t push the date back. Make sure to allow adequate time to run a thorough process.
In terms of public disclosure – an earnings call is best. Address the topic in the prepared remarks. Anticipate investor questions and proactively address in the prepared remarks. Repeat your selection process in the prepared remarks each EPS call until a new CEO is named.
Define CEO Selection Criteria (share publicly): For example:
“As CEO I will work with the Board to define the criteria by which XYZ will select its next CEO…”
“Myself and the Board have defined the CEO selection criteria…”
“We will consider both internal and external candidates…”
“We have a deep bench of qualified executives and therefore will limit the selection process to internal candidates…”
“We will select the best candidate that embodies our culture and core principles…”
“Our next CEO will have a core competency around new product development…”
“Our next CEO will have had a rich global operating experience including significant time operating across Asia…”
It Helps to Have A Strong Corporate Culture and Well-Defined Principles
Whatever the selection criteria and core CEO attributes may be, lay them out. Companies with strong corporate cultures and well-defined principles will have an easier time with CEO Succession and its external communication to investors. CEO Succession should not be an event-driven process but rather an operations-driven process where internal executives qualify themselves and audition for the next job every day.
We covered this topic in a recent CEORaterPodcast:
BlackRock (tkr: BLK) is going “activist” within the passive investment (i.e. index funds) side of their house. Regardless of whether or not you agree with the approach (we don’t entirely agree with the social activist element nor the activist approach to passive funds) there is great merit to the idea of holding public company management teams and Boards accountable from a strategic, tactical, operational and general Corporate Governance standpoint.
Additionally, both institutional investors and company management teams need to do a better job of engaging one another. BlackRock’s Corporate Governance effort should be a catalyst to kick start a more substantive and frequent dialogue between institutional investors and public company management teams. For that, we applaud BlackRock.
We share our perspective on this matter in CEORater Podcast episode 111:
Further, here is Larry Fink’s open letter to CEOs and Boards: Read Here.
We Have Entered an Unprecedented Era of Shareholder Tolerance It is interesting that corporate boards and institutional investors are willing to tolerate “Distracted CEOs” and founder CEOs who wish to exercise outsized control of the companies they founded. Both are examples of poor corporate governance. Our definition of a Distracted CEO is the CEO that…
GE CEO John Flannery has his work cut out starting with re-vamping GE’s Board. Our advice? 100% of GE’s BoD members should have experience within the industry verticals GE cares about. Equally important – GE BoD members should consist of a mix of Insiders and Outsiders with the weighting in favor of Insiders. More detail in CEORater Podcast Episode 81:
We at CEORater recently published a report analyzing executive compensation which you may access HERE (should you prefer the Excel version email us at: email@example.com). We take a unique approach in that we measure CEO compensation as a percentage of market cap. In the future it is likely that we will measure CEO compensation against other metrics such as YTD total stock return as well as vs. peer group performance. We aim to incorporate these and other metrics into the CEORater platform in the not too distant future as part of a portfolio of self-service tools. For now, enjoy the list. By the way, you don’t want to be at the top of our “Comp to Cap” report.
The Three “I”s for Selecting Board Members:
1.) Intellectual Curiosity
2.) Industry Experience
IBM lacks Board members that have Software industry experience other than CEO Ginni Rometty. We recommend that IBM turn over its Board and replace BoD members with new members who have significant Software industry experience given that Software – particularly a strategic M&A plan focused on Software/SaaS/AI/ML/Info Services acquisitions – is likely what will lead IBM out of its malaise. If IBM does not address its BoD and Executive shortcomings proactively it is probable that an Activist investor will make changes for IBM – with or without the latter’s consent. Click HERE for our CEORater Podcast episode concerning the 3 “I”s.
Below is a post I wrote late last night and published to LinkedIn under CEORater. The post was in response to a Wall Street Journal article published about the use of an executive jet by former GE CEO Jeff Immelt which was not reported to the company’s Board. Short story is that too much is made of executive perks and insufficient attention is paid to executive performance and overall organizational performance.
“Let’s have a little clarity, honesty and transparency. An extra plane is small beans from an absolute dollar standpoint but speaks to a cultural/ political divide between GE‘s executive team and Board. By the way, shame on the Board if an extra plane was a “big deal”. At the end of the day performance is what matters. Operating performance/financial performance and stock performance with some balance between intermediate and long-term results (we are not advocates of “the next quarter”) matter. Beating “sand-bagged” financial targets is irrelevant. Achieving or almost achieving true stretch goals is relevant (which is why we hate the game of public companies publishing “guidance” much of which is sand-bagged). Every employee – CEO on down – whom contributed to performance/outperformance should be handsomely rewarded. This is why accountability matters. Otherwise, it is difficult to tie rewards back to those whom deserve them at the appropriate weighting. One size does not fit all when it comes to variable compensation.”