Board Succession – by Failing to Plan, You Plan to Fail

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The recent spotlight on Steve Jobs and Apple’s succession planning—or lack thereof—has created new urgency among investors and shareholders to demand that the companies in which they invest have a clear succession plan. Although boards of directors for numerous Fortune 500 companies see the advantage in succession planning, there are few who take the protocol seriously enough. Investors and observers have criticized Apple for lacking transparency in its long-term plans and have become uneasy about what Jobs’ second leave of absence will mean to the company without a succession plan in place. MarketBeat reported that:

Institutional Shareholder Services said all companies should have succession plans in place, and Apple shareholders would benefit by having a report on the company’s succession plans disclosed annually. “Such a report would enable shareholders to judge the board on its readiness and willingness to meet the demands of succession planning based on the circumstances at that time,” ISS said.

While succession planning is often put off by companies, it shouldn’t be put off.

A survey conducted by The Korn/Ferry Institute, a North Carolina business intelligence firm, reports that 98 percent of the 1,318 executives polled in 2010 agree that CEO succession planning is important in the overall corporate governance process, while only 35 percent are actually prepared for either the unexpected or planned departure of their company’s CEO.

The Securities and Exchange Commission in 2009 and in late 2010 issued rule changes that prevent companies from dodging the succession question. As witnessed by Apple’s example, board succession is more than just a human resources issue, as it was in the past. There is a risk management factor in teeing up the next company CEO. Shareholders understand the associated risk that exists when there is no plan in place. As companies become more accountable, succession planning has shifted from being part of “ordinary business,” to an important component of risk management.

In Apple’s case, the company could have avoided shareholder anxiety by making public its outline of criteria for selection and its development plan. It’s annual report time for the company, and shareholder questions related to Mr. Jobs’ successor will undoubtedly be top of mind.

Bigger Paychecks Expected for American Workers

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American workers may be justified in expecting bigger paychecks in 2011.

A combination of booming exports and growing corporate profits is providing momentum to the national economic recovery, with U.S. workers poised to reap the benefits in the form of wage increases.

While companies have single-mindedly focused on cutting costs in recent years, the latest Duke University/CFO Magazine Global Business Outlook Survey found that chief financial officers expect wage increases of 2.5% for 2011, up from the 1.9% they predicted for 2010.

In addition, a recent Wall Street Journal survey found economists are expecting 2011 to see the creation of 180,000 jobs a month. The National Association of Corporate Directors’ (NACD) latest Board Confidence Index (BCI) concurs with this optimistic outlook. A majority of U.S. corporate directors predict that their companies will either retain or expand their workforce, according to data from the NACD BCI for Q4 2010.

While it isn’t clear how widespread the increase in wages might be, some industries, such as manufacturing (which added 136,000 jobs over the past year), may have to actually compete to attract and maintain employees. That is a dramatic shift from today’s job market, providing much-needed relief to individuals who have been worried about finding jobs or keeping the ones they have.

With the official end of the recession having occurred in 2009, the prospect of higher wages and an increase in employment is long-overdue good news for the U.S. workforce. It also means that boards of directors can focus on longer-term goals for their companies, and not worry about simply keeping their companies afloat.

NACD Insight and Analysis: Communicating for Long-Term Value

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This week, NACD bridged the gap between corporate directors and the investors they represent. In conjunction with Broadridge Financial Solutions, NACD hosted a Virtual Roundtable at the Newseum in Washington, DC, bringing together leaders from the investment community with directors to discuss the disclosures and communication strategies.

Hosted by NACD President and CEO Ken Daly, the Roundtable featured investment community representatives from T. Rowe Price, CalSTRS, and Vanguard Group, Inc. They engaged in dialogue with board members from Forrester Research, Broadridge Financial Solutions, Kimberly-Clark, Legg Mason, SmartPros Ltd., and Assure Holding Corporation. With the intent to inform directors on what investors are looking for in the proxy in the upcoming year, the Roundtable discussion covered compensation, committee reports, and director qualification disclosures.

The investment managers represented at the Roundtable do not take a “check-the-box” approach based on guidance from proxy advisory firms; instead, they choose to complete their own analysis. Notably, these active shareholders emphasized quality over quantity with respect to disclosures in the proxy statement. Simply an increase in the amount of disclosures from companies only makes it more difficult for investors to uncover the valuable information in the proxy. The participating investors further suggested companies should make an effort to provide quality disclosures regarding how executive compensation matches performance, and how incentives are linked to the business strategy, for example.

The participating investors also stressed the improvements that need to be made regarding the new director qualification disclosures resulting from the SEC Proxy Disclosure Enhancement rules. They felt many companies did not fully explain how each director’s skill sets contributed to the company’s business strategy.

Lastly, the investors offered advice to the boardroom on director succession. After directors have analyzed their board’s composition in light of the company’s strategy, they find a larger challenge in recruiting directors to fill the gaps in skill sets. As a solution, Anne Sheehan of CalSTRS suggested that directors should “think of their shareholders as stakeholders.” Long-term investors have the same interests as directors and might be able to offer potential candidates whose skills complement the company’s business strategy and build its long-term value.