CEO succession planning is one of a board’s most important responsibilities. However, many companies are unprepared for communicating executive transitions. A recent survey of senior-level corporate executives published by Alix Partners shows that about 50 percent of respondents felt their companies were unprepared for CEO succession, either because the company hadn’t identified possible successors or hadn’t sufficiently trained candidates for the top job.
Communications strategy is an integral part of CEO succession preparedness. Executive transitions can unfold quickly, demanding decisive action in developing the proper message and coordinating communications strategy both internally and externally. When thinking about a possible transition announcement, there are several foundational elements for successfully positioning a senior executive change.
Why is the CEO leaving?
There are a handful of standard reasons a company gives for an executive’s departure. Whether a CEO retires, steps down, is terminated, decides to spend more time with family, or pursues new opportunities, companies must present a clear rationale for the departure. Given nuances in language that could imply the motivations of the executive and company, word choice is especially important. Transitions that appear confusing, mysterious, or acrimonious will spook investors or stoke speculation.
In the age of investor activism, boards look for opportunities to demonstrate they will take action when a CEO is viewed as underperforming. This may lead to a press release that does not shower the outgoing executive with praise, therefore signaling a less-than-favorable view of the executive. Or the announcement may state the departure is by “mutual decision,” again a clear signal. Communicating CEO departure is a delicate balancing act.
When is the right time to communicate about a succession?
CEO transition announcements generally take financial markets by surprise and create immediate concern. As a result, some companies have found ways to prepare advance messaging for a planned transition to precondition the market to a future change.
For example, Kinder Morgan made a quick reference to a future CEO transition in its comments at an investor conference before an established timeline or formal announcement had been made. In another example, when dealing with a series of executive changes over the course of 15 months, Mack-Cali Realty Corp. issued an update about its executive search process six months after the CEO stepped down. Ultimately, the company named its new CEO, COO and president, CFO, and chief legal officer and secretary in one release. It should be noted that Mack-Cali’s case is fairly unique; in proprietary research, Edelman found the majority of companies identify a successor in the initial transition announcement. However, companies stand to learn from Mack-Cali and Kinder Morgan’s inventive approaches to communicating succession plans.
Who gets quoted in the release?
The presence of executive quotes in the release about their departure is another important signal of behind-the-scenes dynamics. If the outgoing CEO is quoted, this suggests some deference to that individual, especially if their quote comes first. If the chair or lead director praises the outgoing CEO in their quote, that again sends a message. However, if the chair makes a statement along the lines of “It’s time to take the company to the next level,” dissatisfaction with current leadership may be signaled to the audience, despite other symbolic cues in the announcement.
What’s the appropriate way to share the announcement?
CEO transition press releases tend to be brief, typically under 150 words. In addition to announcing via newswire, companies will notify their internal audiences directly at the time of the company’s external news announcement, and, if applicable, will also publish the news via their owned media channels (as in the case of Reddit and Twitter). Failure to get ahead of the news can make a company the target of speculation, as was the case with Proctor and Gamble (P&G) when the Wall Street Journalreported a likely scenario for P&G’s leadership transition based on analyst sources.
Employees should be briefed at the same time as the company’s news announcement, so that employees learn about the leadership change and plans for the company’s future from the source and not via the press.
How can companies leverage the media?
CEO transitions typically raise many questions with internal and external audiences, and the media is often quick to report on perceived corporate instability. Companies should consider a proactive strategy to ensure their messages around a leadership transition are understood and conveyed in the first wave of media coverage. A common strategy is to pre-brief a trusted reporter or two to secure a more holistic or accurate story at the outset of the announcement, with an embargo time established to coincide with the press release timeline. Another option is to hold a post-announcement briefing with reporters to provide greater context and answer questions.
How can companies mitigate concerns about financial performance?
The first likely question from the investment community when a company announces a CEO transition is “Does this mean the company will underperform projections?” Companies should consider reaffirmation of their financial guidance if possible at the time of the announcement. Another approach is to package the CEO succession announcement with a quarterly earnings announcement. This approach allows the company to simultaneously address any questions or concerns about financial performance.
As boards develop their transition plans, they will be best prepared for changes at the top of the organization by considering their communications approach as early in the process as possible. During transition planning, communications staff can develop materials to guide executives through a successfully executed exit process that establishes a positive narrative for both the outgoing and incoming CEO alike.
Lisa Schultz McGann is a senior account supervisor in the Financial Communications and Capital Markets practice at Edelman, the largest PR firm in the world.
The final session of the Diversity Symposium at NACD’s 2015 Global Board Leaders’ Summit focused on the Report of the NACD Blue Ribbon Commission on the Diverse Board and how directors can implement recommendations from that report in their own boardrooms. Kapila Kapur Anand, a partner at KPMG LLP and the firm’s national partner-in-charge of Public Policy Business Initiatives, led the discussion with panelists that included Anthony K. Anderson, retired Ernst & Young LLP vice chair, executive board member, and Midwest and Pacific Southwest managing partner; The Hon. Cari M. Dominguez, a director at ManpowerGroup, Triple-S Management, Calvert SAGE Fund, and NACD; and Karen B. Greenbaum, president and CEO of the Association of Executive Search Consultants.
As the Blue Ribbon Commission that produced this groundbreaking 2012 report observed:
[A] company’s ability to remain competitive will rely on its understanding of global markets, changing demographics, and customer expectations. Diversity is a business imperative, not just a social issue. The new business landscape will require boards to cast a wider net to find the very best talent available. As a natural corollary, the board’s mix of gender, ethnicity, and experiences will likely increase.
Dominguez noted that structural, social, and habitual barriers may prevent boards from becoming more diverse, and she offered this key advice: Don’t rely solely on the company’s CEO to lead this conversation. It’s the responsibility of every director to move the discussion forward.
So why aren’t boards as diverse as they could be? Greenbaum addressed this question by referring to data she collected via a survey of both boards and search firms. Her findings surfaced five issues:
Candidate pool. Boards contended that it was difficult to find diverse candidates. Horn countered this claim by asserting that a failure to find qualified candidates is more a function of boards not searching correctly. Boards should demand that search firms provide a diverse list of candidates. Conversely, search firms take their cue from boards and expect them to be vocal about the importance of having a diverse candidate pool.
Term limits. A lack of term limits results in a situation in which boards cannot be routinely refreshed with new directors. If term limits are restricting opportunities to bring on new talent, consider expanding the board.
Experience: Boards resist adding members who are not current CEOs or CFOs. Boards need to be open to first-timers and should develop strong mentoring programs to bring newly minted directors into the fold.
Succession planning: Build a pipeline of diverse talent in your own company so that these leaders can serve not only in your boardroom but also in those of other organizations.
Status quo. Boards can become complacent about how they operate, especially when they feel no pressure from shareholders or other stakeholders to change.
“All of us must be conscious that this is a leadership issue,” Anderson said. “If the leadership of a company doesn’t believe in diversity initiatives, the ability to make much happen is grossly inhibited.” Companies with a diversity strategy that touches on leadership, employment, and procurement are reinforcing the importance of diversity as part of company culture, Anderson added..
Creating change takes time, effort, and formal processes. Putting diversity on the agenda may require a shift in thinking and habits, but, as all of the panelists agreed, diversity is a business imperative that will only grow in importance over the coming years.
For good or ill, activists now are important players in the investor ecology, with increasingly successful records for changing a board’s makeup. At Egon Zehnder, we identified 58 incidents of investor activism against S&P 500 companies over the last two years. Of those, 16 contests involved changes to board composition, urging a “no” vote on the management’s slate of directors or proposing, or threatening to propose, an alternative slate. And of those, only six concluded in favor of management, resulting from the activist slate being withdrawn before a vote or management’s victory in a vote.
It is not surprising, then, that many boards are evaluating their plans for responding to an activist slate this proxy season. Broadly speaking, however, there are really only two possible courses of action a board can take. One path is to accept the reality of activist scrutiny and build it into the nominating committee’s ongoing work. The nominating committee needs to look at the board with an objective eye and identify how its composition might give an activist a foothold, such as directors with conspicuously long tenures or directors whose experience is unaligned with the company’s business and its strategic direction. The nominating committee must then design a director succession plan that identifies, cultivates, and elects candidates with the desired competencies. Doing so is not a guarantee against activist action, but having a carefully chosen board with relevant backgrounds and perspectives deprives activists of a clear weakness to exploit.
Because board seats turn over intermittently and because competition for directors is so high, fully executing this strategy can take several years. In the meantime, an activist investor may well decide to put forth its own slate. When that happens, the nominating committee must shift into high gear. In the 16 activist initiatives involving changes to board composition, the median campaign length was found to be only 77 days—just 11 weeks from the initial announcement to some sort of resolution. And six of those 16 initiatives concluded in less than one month.
Of course, the company could stick with its current slate and hope it receives the necessary votes. But once activists have sown the seeds of doubt in the minds of other investors, events have shown that change is more or less preordained. It is simply a matter of whose change will prevail.
Because time is of the essence when faced with an activist slate, it is incumbent upon boards to watch closely for tremors that might precede such an action. Besieged boards might feel blindsided, but successful activist attacks rarely come out of the blue. Seven of the companies that were subject to investor activism on board composition were the targets of initiatives from more than one group. For example, while Starboard’s Jeff Smith may be the one credited with replacing the Darden board, that upheaval only followed an initial salvo from Barrington Capital Group. Once the board gets the faintest sense that it is the object of activist interest, it needs to move quickly to examine its composition and reshape it as needed.
When the battle is joined, boards must ensure they do two things. First, they must reach beyond their usual networks in identifying new director candidates. Expanded networks are more likely to allow the board to draw upon candidates with a wider range of perspectives and experiences. Furthermore, the wider pool of candidates (and connections to candidates) is essential if a company can hope to quickly assemble a slate that doesn’t look quickly assembled.
Once the company has its nominees, it then must convince the investor community to give its support. Here it is particularly helpful to steal a page from the activist playbook. Activists know that no matter how good their slate may be, their real power lies in their ability to sway a majority of investors to their side. As a result, the best activists are also the best communicators. They make sure that the story they tell is clear and compelling and then tell that story relentlessly. If management has been less than successful, it is because they have been out-maneuvered in the court of investor opinion. Management must make sure that the story they tell about their slate is even more compelling than that put forth in support of the activist candidates, and it must be told with the same energy and clarity.
The bottom line is that nominating committees must build strong director succession plans that result in boards that are clearly relevant for the challenges and opportunities the business is facing. Their only choice is whether to do so preemptively and with the luxury of time or, instead, with their back to the wall and the clock ticking.
George L. Davis co-leads Egon Zehnder’s Global Board Practice and is a trusted advisor across a host of corporate governance matters, with particular focus on leadership succession planning and board effectiveness. Kim Van Der Zon leads the U.S. Board Practice of Egon Zehnder International and has expertise in CEO succession. She has successfully served Fortune 500 clients across a broad spectrum of global companies from financial services and consumer packaged goods to pharmaceuticals and technology.