Unrealistic timelines and lack of understanding of obligations to the current and incoming CEOs are among the top mistakes companies and boards make when transitioning CEOs, according to a new report by Skadden. Among the “nine mistakes to avoid” based on working with boards on CEO succession were the following:
- Unrealistic Timelines. Often during a CEO transition, things move quickly – sometimes too quickly to ensure important concerns are considered. Skadden recommends that board and committee meetings be “properly scheduled and noticed” and in some cases, the current CEO must legally be notified before the board acts. Securities law requires filing of public disclosures multiple times along the way – the terms of the outgoing CEO’s departure, the new CEO’s agreement, and communication with investors need to be carefully managed to ensure compliance.
- Excluding Relevant Stakeholders. Although confidentiality is important, Skadden notes that excluding individuals such as the CHRO, General Counsel or the board’s independent compensation consultant can cause more problems than it solves.
- Obligations to Current CEO. Foot faults can occur where there is lack of understanding regarding all obligations to the outgoing CEO – the terms of the employment agreement, severance plan, equity award agreements and other outstanding obligations. This is where failing to engage the CHRO or compensation consultant can be dangerous.
- Terms of Offer to New CEO. In the same vein, companies should avoid having the board try to manage the terms of employment for the new CEO without the advice of the compensation consultant. There may be limitations, internal or external, of which the board is not aware that may impact the compensation arrangements for the new CEO.
- Disclosure of Reason for Termination. ISS recently codified its stance on executive severance to stipulate that if a termination is not involuntary, or is not clearly disclosed as involuntary, there is a major risk of a “no” recommendation on Say on Pay. This can be very tricky in circumstances where there is lack of consensus among board members on what the company should say publicly about the CEO’s departure. Contractual agreements to confidentiality and non-defamation may also come into play.
- Legal Impact of CEO Termination. Finally, Skadden notes that the termination of a CEO may trigger contractual rights for other executives, including “good reason” provisions, and may impact the enforceability of non-compete provisions or other restrictive covenants for the CEO.