SEC Targets CEO Succession Plans - New Risks for Boards, Says Heidrick & Struggles

• Press Release
• Source: Heidrick & Struggles
• On 9:30 am EDT, Friday October 30, 2009

CHICAGO and NEW YORK, Oct. 30 /PRNewswire/ -- "There is a whole new level of risk for corporate boards that could stem from the SEC's legal bulletin this week, ushering in a sea change in how directors will view CEO succession planning," says Stephen Miles, Vice Chairman of Heidrick & Struggles and Managing Partner of the firm's leadership advisory services.

In a legal notice dated October 27th, the Securities and Exchange Commission's Division of Corporation Finance signaled increased concern about CEO succession planning among corporate boards. The bulletin, in effect, for the first time allows shareholders to request more disclosure from companies as to how boards select new CEOs.

What does the SEC's new notice mean?

"This change will likely mean that succession planning will now draw the same attention from shareholders that audit and compensation have been receiving," says Ted Dysart, a Managing Partner at Heidrick & Struggles and a leader in their board of directors practice. "Shareholders and regulators are sharpening their sights on how CEOs are chosen, and boards may have to wrangle with new risks."

What are the risks for companies?

"First, there is a structural risk," says Mr. Miles. "Who will be responsible for 'owning' CEO succession planning on the board? For instance, unlike the audit committee chair, the head of the board's nominating or governance committee - the person often responsible for leading this process - doesn't have to be 'qualified.' To date, the person responsible for succession planning hasn't had to be experienced in this at all."

"Second, there is a process risk. In the post-Sarbanes-Oxley era, every company says 'we do succession planning,' which gives boards and shareholders a false sense of security that there is a viable successor in place. In fact, the board might have simply checked the box on a plan without a truly viable successor ready to step to the plate.

"Another risk is the CEO himself. Many CEOs are threatened by real succession planning and will often want to control the process of picking their successor. And some CEOs, in trying to insert themselves into the planning, will overplay their internal choice - which can contaminate the process.

"Finally, there is the 'people risk' - do boards understand the capabilities of people below the CEO? Instead of viewing succession planning as a single-person event, companies must evaluate the bench strength of the full C-suite team, and even those one level below that, to determine if a viable candidate can be found in the organization."

What will be the consequences of the SEC's new guidance?

"Just as firms must 'stress test' their balance sheet and financial assumptions, companies will likely have to stress test their succession plans each year," says Mr. Miles. "They will need to take a hard look at the people in leadership roles who are responsible for succession planning and establish credentials for stewarding this process."

"Another practical result is that this may require boards to spend more time in the field to gain greater exposure to successor candidates. True viability can only be measured when evaluating the potential successors on the job rather than through the filter of the sitting CEO.

"And, most important, many companies will likely have to change their succession criteria. Instead of a rearview mirror look at what worked in the past, boards will need to identify a detailed skills and experience profile for the direction of the company moving forward. This means matching potential candidates with the needs of the company rather than simply conducting a 'horse race' among the candidates."

A required investment

"Succession is fraught with risks, just like finance and audit, except it is a much harder risk to manage because it is human risk," says Mr. Dysart. "It requires experience combined with an investment in the process and excellent advice from trusted advisors - boards can no longer afford to 'check the box' and consider it done."

If you would like to speak with Stephen Miles or Ted Dysart, please contact Davia Temin or Suzanne Oaks of Temin and Company at 212-588-8788 or news@teminandco.com.

About Heidrick & Struggles

Founded in 1953, Heidrick & Struggles International, Inc. (Nasdaq: HSII - News) is recognized as one of the world's leading executive search firms. With more than 60 offices in the principal cities of 33 countries, it helps its clients to address strategic issues that have human capital solutions in times of growth, turnaround, acquisition, integration, expansion into new markets, and economic flux.

With its executive search, leadership services, and interim management capabilities, Heidrick & Struggles can seamlessly integrate a customized approach to meeting the diverse leadership challenges facing its client organizations. The organization prides itself on its relationships with, and immediate access to, some of the world's most talented people.

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