The Conference Board on August 12 released a report that reveals flaws in how many corporate boards execute their fiduciary responsibilities on CEO succession planning and leadership development. The Conference Board report includes a road map of five critical steps for boards to remedy the current situation. It is the sixth and final report in The Conference Board series on the oversight role of the board of directors in the current economic crisis.
Due to the strategic challenges posed by the economic downturn, an increasing number of companies have been facing sudden, unforeseen CEO departures or dismissals. Estimates for 2008 alone indicate that, in the United States, the chief executive officers of more than 1,400 public companies left their positions by the end of the year, a record number for the last decade. And the trend has continued into 2009.
"Of course, some sectors were affected more than others - the financial services industry, for example, given the heightened public scrutiny of the last year and the many banks around the country that became the target of government intervention," says Matteo Tonello, associate director, corporate governance at The Conference Board and co-author of the report with John C. Wilcox and June Eichbaum. "But this surge in CEO turnover remains a generalized phenomenon and all corporate boards should take notice."
"When it comes to leadership transition, underperformance can be very expensive," says June Eichbaum, who advises the board of The Cooke Center for Learning and Development, where she was a founding director. Research shows that the faulty integration of a senior executive can cost the company 10 to 20 times the executive's salary in opportunity costs and has lasting consequences on the stock price. When taken collectively, succession failures also have repercussions on the U.S. economy, generating productivity losses and social costs valued at nearly $14 billion per year.
"Despite these astonishing numbers, several governance surveys find that as many as half of the U.S. public companies do not rely on a detailed succession plan for C-suite executives," adds Eichbaum.
Among its recommendations, the report urges directors to make CEO succession planning integral to long-term business strategy and ensure that the compensation committee is fully involved.
Says John Wilcox, chairman of Sodali Ltd. and former head of corporate governance at TIAA-CREF: "The financial crisis showed, once again, that executives do what they are paid to do. The compensation committee charter should reinforce the notion that compensation is central to talent development and should explicitly call for collaboration on issues of succession planning with the full board."
"Some companies have reinforced this broader strategic role of their compensation committee by renaming it – General Electric, for example, has instituted a Management Development and Compensation Committee to assist the board in developing and evaluating potential candidates for executive positions," concludes Wilcox.
"In these difficult times, The Conference Board is renewing its commitment to provide guidance to the boards of directors of its member companies," says Tonello, who also directed the entire research series. This report concludes a series encompassing crucial areas of board responsibilities, such as: assessing corporate strategy; overseeing executive compensation and risk policies; CEO succession planning; avoiding shareholder activism; preparing for unsolicited takeover offers; and overseeing internal investigations. The recommendations included in the separate reports are being collected in a single book entitled The Role of the Board in Turbulent Times: Leading the Public Company to Full Recovery, to be released by The Conference Board in the fall.
