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Coming to a Proxy Near You: CEO Succession

Matt Kelly | February 24, 2010

Yesterday I wrote about executive compensation as a huge part of corporate governance that can sound a terrible tone at the top if handled poorly. Today I want to write about another, often-overlooked part of governance: CEO succession.

We should see some fresh action on CEO succession this proxy season. The Securities and Exchange Commission set the stage for that expanded discussion last fall, when it published a legal opinion paving the way for shareholders to put resolutions about CEO succession into the company proxy statement. Historically, companies had the discretion to omit such questions from the proxy; now they don’t. The first large company to face one of these shareholder resolutions is Whole Foods Market. At its March 8 meeting, shareholders will vote on whether Whole Foods should report on CEO succession annually.

Why am I such a fan of planning for CEO succession? Because it shows that senior management believes survival of the business is more important than the CEO individually—and that demonstrates a strong, ethical tone at the top. It sends employees, customers and investors the message that the company’s leadership (primarily the board) sees the value inherent in the company as something that exists apart from what the CEO wants to do with the company. It sends the message that the company exists beyond that person atop its organizational chart.

Let’s not forget, after all, that employees generally fear that person at the top of the chart. He or she has huge power to influence the worker’s life, because he has the power to eliminate that person’s job, dole out pay raises, assign interesting work, and so forth. Once employees start perceiving the company as little more than apparatus to serve the CEO’s interests, ego and compensation goals, the culture of ethics and compliance that you’re supposed to have is gone. They need to see tangible proof that the leaders view the business as something separate from themselves.

I do wonder sometimes how a governance advocate within the company, regardless of his or her specific title, can prod a reluctant board to develop stronger succession plans. How do you “audit” tone at the top on practical level? How do you then tell senior management that its tone is poor? Is it really the place of the chief compliance officer or chief audit executive to tell the board what steps it should take to rectify the situation? By definition, a company with poor tone at the top won’t take such news well. I wouldn’t want to be the one delivering it.