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.
On March 3, 2015, NACD in partnership with Compensation Advisory Partners, Farient Advisors, Pay Governance, Pearl Meyer & Partners, Semler Brossy, and Steven Hall & Partners, will host its annual Leading Minds of Compensation event in New York. Here, a collective of the nation’s leading experts will provide their insights on compensation challenges directors need to be attuned to in 2015. In anticipation of this event, Semler Brossy’s Blair Jones and Seymour Burchman explore the perpetual issue of pay for performance.
When it comes to executive compensation and company performance, directors commonly go by the following “rule:” The goals for the coming year should exceed last year’s results. Some directors believe that, if performance goals decline, executives should not receive any bonus, even if the business environment won’t allow the company to exceed its prior performance record. But the rule that requires companies to always set higher goals for top-line and bottom-line results should not be considered hard-and-fast. Even as companies aim for long-term, continuous improvement, there are legitimate cases when lowering the bar is acceptable.
Three situations show that circumstances occasionally dictate the need for lowering performance goals. The first situation is when a company is run by executives who consistently deliver outstanding performance, but in an economic downturn oversee a period of falling results that still top the industry. (This example holds true for virtually any company caught in a major economic downturn.) The second is when a company comes off several years of great results, but executives and the board decide to make major investments to enhance long-term competitiveness, lest competitors catch up. The third is a cyclical commodity-based company that, in spite of best-in-class operational efficiencies and rising sales, gets blindsided by volatile raw-material prices, boosting the costs of goods sold by a third or more.
Executives at these companies should not always be expected to demonstrate year-over-year improvement. Asking them to essentially juice results during a single year might even hurt the long-term success of the business. (Deferring an investment to meet current year profit goals may result in losing ground to competitors in the long term. Similarly, deferring maintenance to reduce current year costs can lead to increased downtime down the road.) That’s not to say directors should accept anything less than a long-term record of sustained, rising results, only that for temporary periods decline may fit within that record.
So what steps can a board take to ensure that year-over-year declines are truly exceptions? First, directors should begin every goal-setting cycle with the simple premise that year-over-year improvement is the standard. Second, if management contends that a decline is inevitable, directors should consider the steps management has been taking to anticipate and mitigate the decline. For example, are there valid strategic reasons for a decline, such as ramping up long-term investment? Can the board reasonably expect, based on management’s plans, that investments will lead to future performance that compensates for the decline?
If external forces are contributing to the decline, the board needs to consider whether management explored all reasonable alternatives to avert the decline. Key questions the board should raise include:
If a demand slowdown was forecasted, did management adequately explore new market opportunities to offset declines via new channels, new geographies, or the use of new methods to reach customers (e.g., “big data”)?
If raw material costs were forecasted to rise, did management consider hedging increases or consider alternative sources of supply?
If competitors have breakthrough product launches planned, did management anticipate these launches, and where possible, accelerate its own development of potential competing products?
If manufacturing costs were forecasted to rise, did management either consider reengineering current processes or explore potential cheaper outsourcing solutions?
If disruptive technologies were likely to affect the industry, did management position the company to swiftly take advantage?
As part of examining the steps management is taking, the board should also look at its own actions. Key questions the board should ask itself include:
Was the board involved fully in the development of this strategy, and did executives make short- versus long-term tradeoffs clear?
Have directors demonstrated adequate goal-setting discipline themselves as evidenced by balance and symmetry in their decisions over time?
Were unfavorable circumstances that resulted in more lenient goals balanced by favorable circumstances with more aggressive goals?
If the board is to make exceptions to an otherwise universal standard of continuous improvement, it needs to follow certain standards in adjusting goals. It may be that a board can become comfortable in setting lower goals at threshold and target, but maximum goals require truly superior performance.
Third, once the board makes an exception, it should balance the interests of the management team and shareholders. Shareholders deserve to know that directors have set adequate stretch goals to drive superior performance. Over time, goals should result in performance and payouts that meet four tests:
They are sufficient to generate returns above the risk-adjusted cost of capital, and presumably in turn boost total shareholder return.
They align relative pay and performance with peer companies.
They represent a fair sharing between executives and shareholders of the value created.
The rewards are sufficient to keep executives motivated and engaged.
No director takes the lowering of performance goals for granted. Management has the responsibility to develop, execute, and reformulate a strategy to deliver year-over-year improvements. But times come when exceptions are warranted for the long-term success of the company. The aim then is simply to create the most effective way to reward and motivate executives while keeping performance at the necessary level for sustained success.
An executive compensation consultant since 1991, Blair Jones currently serves as a managing director of Semler Brossy Consulting Group. She has worked extensively across a variety of industries and has particular depth of expertise working with companies in transitional stages. She may be contacted at firstname.lastname@example.org. Seymour Burchman is a managing director of Semler Brossy Compensation Group and has been an executive compensation consultant for over 20 years. His work focuses on reinforcing key strategies and leading to improved shareholder value through the identification of performance measures and goal setting processes. He may be contacted at email@example.com.
As companies prepare for and react to the unique external events that will shape their corporate climate in the months and years to come, they can benefit from external benchmarks for their corporate governance practices. However, in a year marked by a troubled economy and sweeping legislative reforms, standards for best practices in governance often become increasingly murky.
NACD helps boards tap into the latest trends and issues for boards with our 2011 Public Company Governance Survey. The survey offers a comprehensive review of the most up-to-date governance trends, incorporating input from almost 1,300 individuals from public company boardrooms. In addition, the information gleaned from respondents is enhanced by the inclusion of data from 2,400 proxy statements compiled by Institutional Shareholder Services.
The survey provides insights on a wide range of issues, including shareholder communications, CEO succession planning, director competence, and directors’ response to new proxy disclosure requirements. In addition, it features a special section on executive compensation, which is broken down into 24 industry sectors. Among the key survey findings this year:
The board’s role in overseeing strategic planning, corporate performance and valuation are top priorities for the majority of respondents.
Nearly 70 percent of respondents characterize their company’s long-term strategy as “balanced,” with moderate risk and moderate expected reward.
Directors believe that their current governance structures and practices enhance their ability to effectively and efficiently fulfill their duties.
Most boards have not formalized their CEO succession plans.
Nearly one-third of respondents feel the current disclosure requirements for corporate governance are “excessive and should be reduced.”
Data gleaned from this latest survey is also used to create the comprehensive NACD Custom Board Benchmarking Report, which provides boards with the opportunity to conduct an in-depth analysis of their current structures, practices, strategies and policies in comparison to their industry and peer group companies.