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Sokol Exit Underscores Benefit of CEO Succession Planning

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David Sokol, presumed successor to Berkshire Hathaway Chairman and CEO Warren Buffett, this week announced his departure, a surprise to most observers. An employee of Berkshire for 11 years, Sokol was chairman of MidAmerican Energy Holdings Co. and CEO of NetJets, both Berkshire subsidiaries. Sokol’s resignation followed the disclosure that he had purchased shares worth nearly $10 million in Lubrizol Corp., a chemicals company that Berkshire subsequently announced plans to invest in. Both Buffett and Sokol insist the purchases were legal and did not contribute to Sokol’s decision to resign.

Despite the current debate surrounding the Lubrizol transactions, Sokol’s departure highlights an issue that boards grapple with every year—CEO succession planning. Berkshire’s succession plan has been of critical interest for years, and will continue to be until Buffett’s successor is publicly identified. Filed in early March, the company’s Form 10-K listed four potential successors to Buffett, each simply described as “a current Berkshire subsidiary manager.”

CEO succession planning is a key board responsibility—and NACD’s annual governance surveys reveal that directors view it as such. Since 2009, CEO succession has ranked in the top five of board priorities. However, many directors feel they are not well prepared for replacing the CEO. PwC’s Annual Corporate Director Survey found that about 30% of directors are not satisfied with their company’s succession plan.

To develop and assess internal candidates, directors should begin discussions on long-term succession planning three to five years before a CEO transition is expected, Plans should also provide guidance for an emergency succession situation.

Succession planning is the topic of this week’s BoardVision with NACD’s Peter Gleason and PwC’s John Barry, which can be viewed here.