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CEO Succession: Key Considerations for Public Companies

Succession planning is critical to the long-term success of a company. A well-developed plan for CEO succession makes a smooth transition more likely when a CEO departs or retires. It can also prevent disruptions to the business. With CEO turnover increasing among large companies in recent years, a comprehensive CEO succession plan has become more important.

In addition to being a good corporate governance practice, CEO succession planning is also a requirement for companies listed on the New York Stock Exchange (NYSE). The NYSE listing standards mandate that companies formulate policies and procedures for the selection of a CEO in the event of unexpected circumstances or the retirement of the CEO. Nasdaq does not currently have an equivalent requirement.

A company’s board of directors plays a critical role in CEO succession planning and should be proactive in developing a succession plan well in advance of any anticipated CEO departure. They should take steps to identify potential candidates early on and ensure that the company is building a pipeline of well-qualified candidates internally.

The nominating and governance committee of a company’s board of directors typically will lead the process of setting selection criteria and recommending CEO successor candidates. A board’s compensation committee may also play a role in CEO succession planning given the increasing scrutiny of executive compensation issues in recent years. If both the nominating and governance committee and compensation committee are involved in CEO succession planning, it is important to clearly define the specific roles that each board committee will play in the process.

Perhaps counterintuitively, CEO succession planning is something that should start early in a CEO’s tenure. If a company is unprepared in the event of an unexpected CEO departure, it can result in diminished confidence in the company’s leadership and open the company to attacks by activist shareholders.

The board must treat the topic of CEO succession planning with an appropriate level of sensitivity. It may be a particularly challenging topic to bring up at a high-performing company. The current CEO may be offended as to why there are ongoing discussions on the topic of a replacement CEO when he or she displays effective leadership of the company.

Each company’s board of directors must design appropriate procedures and processes for filling a CEO vacancy; there is no one-size-fits-all approach to CEO succession planning. Many companies benefit from a more formalized structure and proactive process for succession planning.

In establishing the selection criteria for a future CEO, the company’s board of directors should consider the anticipated future obstacles that the company may face and potential opportunities ahead. The nominating and governance committee should be aware of the company’s internal pipeline of candidates as well as potential outside candidates. They should establish a roadmap for identifying a suitable CEO successor who fits with the company’s cultures and values.

The significance of cultural compatibility cannot be underestimated. While a resume can display business acumen and experience, the CEO must be able to effectively communicate with the company’s board of directors and management team in order to successfully run the company. This underscores the importance of studying the personal qualities and characteristics of potential successor candidates.

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