Posts Tagged ‘Succession’

Considerations for Directors in the 2014 Proxy Season and Beyond

Posted by Amy L. Goodman, Gibson, Dunn & Crutcher LLP, and John F. Olson, Gibson, Dunn & Crutcher LLP and Georgetown Law Center, on Monday January 27, 2014 at 9:19 am
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Editor’s Note: Amy Goodman is a partner and co-chair of the Securities Regulation and Corporate Governance practice group at Gibson, Dunn & Crutcher LLP and John Olson is a founding partner of Gibson, Dunn & Crutcher’s Washington, D.C. office and a visiting professor at the Georgetown Law Center. The following post is based on a Gibson Dunn alert by Ms. Goodman, Mr. Olson, Gillian McPhee, and Michael J. Scanlon.

As we begin 2014, calendar-year companies are immersed in preparing for what promises to be another busy proxy season. We continue to see shareholder proposals on many of the same subjects addressed during last proxy season, as discussed in our post recapping shareholder proposal developments in 2013. To help public companies and their boards of directors prepare for the coming year’s annual meeting and plan ahead for other corporate governance developments in 2014, we discuss below several key topics to consider.

…continue reading: Considerations for Directors in the 2014 Proxy Season and Beyond

Executive Pay Disparity and the Cost of Equity Capital

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday September 15, 2013 at 9:50 am
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Editor’s Note: The following post comes to us from Zhihong Chen of the Department of Accountancy at City University of Hong Kong, Yuan Huang of the School of Accounting and Finance at Hong Kong Polytechnic University, and K.C. John Wei, Professor of Finance at Hong Kong University of Science & Technology (HKUST).

In our paper, Executive Pay Disparity and the Cost of Equity Capital, forthcoming in the Journal of Financial and Quantitative Analysis, we investigate the association between executive pay disparity and the cost of equity capital. Understanding the association is important because the cost of capital is one of the key considerations for managers in their capital budgeting and corporate financing decisions. In fact, the cost of capital is a more direct yardstick of corporate investment and financing decisions than firm valuation. A higher cost of capital means fewer positive net present value (NPV) projects, leading to fewer growth opportunities. In addition, the cost of capital summarizes an investor’s risk-return tradeoff in his resource allocation decision (Pástor, Sinha, and Swaminathan (2008)).

In general, there are two perspectives on executive pay disparity. The tournament perspective views the large pay gap between the CEO and other executives as the prize for a tournament in which players compete for the CEO position (Lazear and Rosen (1981); Kale, Reis, and Venkateswaran (2009)). A large pay disparity motivates non-CEO senior executives to work hard and to invest in firm-specific human capital. This, in turn, helps build a large pool of skilled internal candidates for the CEO position. The availability of skilled internal candidates not only reduces the entrenchment of the incumbent CEO by increasing the bargaining power of the board, but also reduces CEO succession risk. Therefore, this perspective predicts a negative association between executive pay disparity and the cost of capital.

…continue reading: Executive Pay Disparity and the Cost of Equity Capital

Risk Oversight; Effective Board and Committee Leadership

Editor’s Note: Jeffrey Stein is a partner in the Corporate Practice Group at King & Spalding LLP. This post is based on two reports from the Lead Director Network by Mr. Stein, Bill Baxley, and Rob Leclerc, available here and here.

Board oversight of risk and effective board and committee leadership are high priorities for virtually every board of directors. While success in these matters has always been essential to maintaining a high-performing board, how boards approach the risk oversight function and seek to maximize board and committee leadership continues to evolve. Strategic risks can threaten a company’s very existence and stakeholders continue to challenge traditional approaches to board leadership.

The Lead Director Network (the “LDN”) and the North American Audit Committee Leadership Network (the “ACLN”) met on June 4th and June 5th to discuss risk oversight and effective board and committee leadership. Following these meetings, King & Spalding and Tapestry Networks have published two ViewPoints reports to present highlights of the discussion that occurred at these meetings and to stimulate further consideration of these subjects. Separate reports address Board Oversight of Risk and Effective Board and Committee Leadership.

The following post provides highlights from the LDN and ACLN meeting, as described in the ViewPoints reports.

…continue reading: Risk Oversight; Effective Board and Committee Leadership

Communication Practices in CEO Succession

Posted by Matteo Tonello, The Conference Board, on Thursday July 25, 2013 at 10:22 am
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Editor’s Note: Matteo Tonello is managing director at The Conference Board. This post relates to an issue of The Conference Board’s Chart of the Week series authored by Dr. Tonello.

A review of the CEO succession announcements made by S&P 500 companies in 2012 showed that they typically included details on when the succession would take effect, why the departing CEO is leaving, and whether the incoming CEO will be named board chairman; a statement by the departing CEO on his/her belief that the board has selected a qualified replacement; a statement by the lead independent director that the incoming CEO is the right choice for the company, given its current position, and thanking the departing CEO for his/her service; a statement from the incoming CEO that the existing management team is strong, the company is well positioned for the future, and expressing appreciation that the board has selected him/her as chief executive; and a description of the incoming CEO’s professional qualifications, and, if necessary, details on other director or senior management changes that will take place.

…continue reading: Communication Practices in CEO Succession

The Landscape of CEO Succession Issues

Posted by Brian Breheny, Skadden, Arps, Slate, Meagher & Flom LLP, on Tuesday July 23, 2013 at 9:10 am
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Editor’s Note: Brian V. Breheny is a partner at Skadden, Arps, Slate, Meagher & Flom LLP. The following post is based on a Skadden memorandum by Mr. Breheny, Regina OlshanNeil M. LeffMarc S. GerberMichael R. Bergmann.

A board’s decision as to whether, when and how to terminate the employment of a CEO and hire a successor is among the most critical decisions facing the board of any company—large or small, public or private, established or start-up. In most cases, however, a CEO termination is a rare event and one with respect to which—as would be expected—the board, the company’s general counsel and its human resources professionals may have little or no experience. In addition, the situation is further complicated by contractual, regulatory and personal factors.

This post describes the substantive and procedural considerations that boards will want to take into account when there is a change of CEO. In it, we assume that the board has made the business decision relating to CEO succession and is focused on strategy, implementation and minimizing potentially costly and/or embarrassing oversights and errors. Many but not all of the same considerations apply in respect of executive officers other than the CEO, and some additional considerations may apply to such other officers; in any event, their relative significance likely will differ from the case of the CEO.

…continue reading: The Landscape of CEO Succession Issues

Governance Lessons from the Dimon Dust-Up

Editor’s Note: Ira Millstein is a senior partner at Weil, Gotshal & Manges LLP and co-chair of the Millstein Center for Global Markets and Corporate Ownership at Columbia Law School.

The recent shareholder “campaign” by a coalition of large institutional investors – AFSCME Employees Pension Plan, Hermes Fund Managers, the New York City Pension Funds, and the Connecticut Retirement Plans and Trust Funds – sought on its face to pressure the JPMorgan Chase & Co. board of directors to amend the bylaws to require that the role of chair be held by an independent director. It became a referendum on two additional issues: Mr. Dimon’s competence as a manager, and the competence of the board’s oversight of risk management. Unfortunately for “good governance,” the three issues become conflated and lead to harangues, heat, and polar positions by all sides, leading to little that’s instructive. It’s worth separating the issues to seek guidelines for the future.

Thoughtful advocates recognize that the board should have flexibility to determine leadership based on the company’s circumstances and rather than seeking to mandate the practice of independent chairmanship, view it as the appropriate default standard – or presumptive model. Even so, very few advocates of the independent chair model favor stripping an extant CEO/chair of the chair title; rather, they urge boards to consider separation upon CEO succession, unless there is an urgent need.

…continue reading: Governance Lessons from the Dimon Dust-Up

Corporate Director Selection and Recruitment: A Matrix

Editor’s Note: Matteo Tonello is managing director of corporate leadership at The Conference Board. This post relates to an issue of The Conference Board’s Director Notes series authored by Lawrence J. Trautman; the full publication, including footnotes, is available here.

Achieving optimal board composition and succession planning requires an articulated and clearly communicated enterprise strategy. The ideal mix of director skills and experience depends on a number of company-specific factors. This report provides a matrix that nominating committees and boards can use to help define their needs and to provoke discussion about how to improve company-specific corporate governance.

How do you build the best board for your organization? What attributes and skills are required by law and what mix of experiences and talents will give you the best corporate governance? What commonly required director attributes are a must for each board and how do you customize and fine-tune your search to achieve a high-performing board? Optimal board composition—that is, achieving the best mix of director skills and experience—depends on many company-specific variables. Some of the most important of these include, but are not limited to: (1) stage of company development, (2) the extent to which international markets are mission critical to the company’s future (in which case nominees should have a detailed understanding of target culture, markets and business risk); (3) unique technology dependence; and (4) the need for access to financial and capital markets.

…continue reading: Corporate Director Selection and Recruitment: A Matrix

Statistics on CEO Succession in the S&P 500

Posted by Matteo Tonello, The Conference Board, on Tuesday May 14, 2013 at 9:52 am
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Editor’s Note: Matteo Tonello is Managing Director at The Conference Board, Inc. This post relates to a Conference Board report led by Dr. Tonello, Jason D Schloetzer of Georgetown University, and Melissa Aguilar of The Conference Board. For details regarding how to obtain a copy of the report, contact

In our study, CEO Succession Practices (2013 Edition), which The Conference Board recently released, we document and analyze 2012 cases of CEO turnover at S&P 500 companies. The study is organized in four parts.

Part I: CEO Succession Trends (2000-2012) illustrates year-by-year succession rates and examines specific aspects of the succession phenomenon, including the influence on firm performance on succession and the characteristics of the departing and incoming CEOs.

Part II: CEO Succession Practices (2012) details where boards assign responsibilities on leadership development, the role performed within the board by the retired CEO, and the extent of the disclosure to shareholders on these matters.

Part III: Notable Cases of CEO Succession (2012) includes summaries of 11 episodes of CEO succession that made headlines in the past two years and that were carefully chosen to highlight key circumstances of the process.

Part IV: Shareholder Activism on CEO Succession Planning (2012) reviews examples of companies that have recently faced shareholder pressure in this area.

The following are some of the major findings discussed in the study:

…continue reading: Statistics on CEO Succession in the S&P 500

Time for Self-Reflection and Pragmatism in the Boardroom

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday February 19, 2013 at 9:11 am
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Editor’s Note: The following post comes to us from George L. Davis, co-leader of the Global Board Practice at Egon Zehnder. Additional readings on board succession and board diversity are available here and here.

The recent study by the well-respected women business leadership group The Boston Club, in their Census of Women Directors and Executive Officers in Massachusetts Public Companies exposed “We are frustrated by the large numbers of companies that persist in ignoring the business imperative for a diverse board.”

The diversity quotient is indeed problematic as the Census found that across Massachusetts’ largest 100 public companies, only 12.7% of board directors are women – and this a 1.6 % increase over 2011. More than a third of the top 100 companies still have all male boards. And, interestingly, less than 2% of the 850 director seats in the Census are held by women of color.

So while diversity is championed by many with virtually no opposition, the progress is slow to materialize at the highest levels of corporate governance. Some ponder that the mindset of a “culture of the familiar” permeates people decision-making in the boardroom, where like meets like and relationships have historically been key to nominations and ultimately appointments of new board members. And, since only a select number of openings arise each year on boards, the slow turnover process only exaggerates an already lagging pace of change.

…continue reading: Time for Self-Reflection and Pragmatism in the Boardroom

Advice for Boards in CEO Selection and Succession Planning

Posted by David A. Katz, Wachtell, Lipton, Rosen & Katz, on Monday June 11, 2012 at 9:29 am
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Editor’s Note: David A. Katz is a partner at Wachtell, Lipton, Rosen & Katz specializing in the areas of mergers and acquisitions and complex securities transactions. This post is based on an article by Mr. Katz and Laura A. McIntosh that first appeared in the New York Law Journal. The views expressed are the authors’ and do not necessarily represent the views of the partners of Wachtell, Lipton, Rosen & Katz or the firm as a whole.

Selecting the chief executive officer and planning for CEO succession are among the most important responsibilities of a company’s board of directors. In ideal circumstances, the succession process will be managed by a successful and trusted incumbent CEO, with the board or a board committee overseeing the process, reviewing the candidates and providing advice throughout. However, in exceptional circumstances, such as when the board lacks full confidence in the incumbent CEO or when a crisis occurs and the normal succession process cannot be utilized, the board will need to take the lead in managing this crucial task. The challenge of CEO turnover is one that boards may face more often than they would like. One source estimates that 40 percent of new CEOs depart within 18 months of their appointment, while 64 percent depart within four years. [1] Nor is the transition inexpensive: The cost of replacing a CEO can range from several million dollars for small-cap firms to tens of millions of dollars for large-cap firms. [2]

In 2011, the CEO turnover rate increased as compared to the previous two years. [3] High-profile resignations and hirings occurred at household-name corporations such as Hewlett-Packard, PG&E, Yahoo!, Costco, and Sara Lee. With the recent publicity surrounding the resignation earlier this month of Yahoo! chief executive Scott Thompson, CEO selection and succession issues have come once again to the fore. Directors facing these challenges should keep in mind that the attitude and smooth functioning of the board are crucial to a sound process and good result, and that the fates of the board and its chosen CEO often are inextricably entwined.

…continue reading: Advice for Boards in CEO Selection and Succession Planning

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