Will Your CEO Be In Tomorrow Morning?
The recent news regarding Steve Jobs’ continuing health problems sent a shudder through the financial markets and investors alike. Steve Jobs is the co-founder and long-time Chairman and CEO of Apple, Inc. He is largely the face and chief strategist of the famed computer maker.
On January 17th he announced that he would be taking a leave of absence from his operating duties as Apple’s CEO to focus on his health. In 2009, he had an organ transplant as the result of a bout with cancer. Tim Cook, Apple’s COO, will assume Jobs’ day-to-day responsibilities. We all hope Mr. Jobs will soon return.
The CEO position is a unique position in a company and the economy. It is the single crossroads where company strategy, policy, values and governance come together, and are uniquely embodied in one person. The CEO is often the face and voice of the company to all constituencies. Mr. Jobs may be the best example ever created of the position’s value and its inherent risk. Hence, the sudden loss of the CEO and the planning for CEO succession and transition is crucial to any enterprise.
Succession planning is one of the primary responsibilities of the Board of Directors and is often managed and evaluated within the Compensation Committee. Succession plans, in our experience, are often two-dimensional documents that discuss how to handle a routine and orderly transition of executive power within the company at the departure of the CEO or other key executive. Most companies have or claim to have a succession plan. Some are very good; others are nothing more than a fill-in-the-blanks exercise. Some companies do not have a plan for CEO succession (or say they plan to do it in the coming year after other more pressing priorities are handled). Where does your company stand on this spectrum?
Let’s try a little exercise today: Your CEO has abruptly called the Board Chair and informed the Chair that he or she would ask for (and take) a leave of absence for health reasons beginning tomorrow morning. How would your succession plan stand the test of such an abrupt and disorderly leadership transition?
To address this issue, we suggest that the Board (or its appropriate committee) roll up its sleeves and honestly answer the following 4 questions regarding its CEO succession plan and its support infrastructure:
- Do you know everything the CEO does and directly touches today? Is it fully documented and what tasks, relationships or transactions would fall through the cracks if the CEO exited tomorrow?
- A CEO has often selected an executive who should become CEO when they leave. Is that selection known and agreed upon by the Board? Is the named executive really up to the job—tomorrow morning or have you accepted the CEO’s choice out of consensus or courtesy? When will that person be ready, if ever?
- How does the Board plan to oversee a new or “rookie” CEO? Will Board processes or Committee assignments and responsibilities need to change? Will a Board member need to mentor the new CEO? Who?
- Does your CEO (and other members of the senior executive team) participate in a full annual health evaluation? An annual physical is a common perquisite for a senior executive and is good way to protect the executive, while also protecting the interests of the shareholders.
So why is this important? Consider what could happen if your CEO unexpectedly departed tomorrow and the transition was indecisive and/or their replacement is perceived to be a step down.
- What will your investors think? If they perceive that the event has increased their investment risk, they will have lost value and will perhaps look for a better place to put their money.
- What will your bankers think? Again, if they perceive their risk has increased, your cost of capital will begin to rise.
- What will the executive team think? You have likely spent much time and energy developing, binding and retaining your top executives. That can all evaporate with appointment of a weak CEO replacement or indecisiveness by the Board. In my personal experience, it takes about six months to begin losing key players when that happens.
- What will employees think? Employees often look up to the CEO as their leader. They will watch very carefully the Board’s decisions and rapidly (and accurately) evaluate the future of the company. A bad choice or Board indecisiveness will dim that evaluation. [See point above]
- What will customers think? If you own an Apple product, you have probably begun to wonder if the brand will continue to be the leading industry technology/application innovator—without Steve. That is a direct challenge to market share.
In short, effective CEO succession planning is important to both reduce and manage company real and perceived risk, and retain the other company key players who will drive your company successfully into the future.
If your company does not have a succession plan for the CEO and other top executives, you are very vulnerable and ought to do something about it starting today. Feel free to use the above outline as a starting point.