Key issues: Succession planning

Overseeing that companies have a robust and sustainable CEO succession plan is one of the most vital functions a board of directors can perform. Recent developments including the high turnover rate of CEOs, increased shareholder pressure for new CEOs at some companies, and incidents of CEO illness have amplified the need for boards to ensure a succession plan is in place, current, and operational.

A company’s long-term viability depends upon successfully identifying and grooming potential candidates for the CEO role. In 2011, the PwC Annual Corporate Directors Survey reported that CEO succession was “top of mind” for directors, with 59% expressing a desire to spend more time discussing it. This increased in 2012, with 68% of directors saying they wanted more board hours to focus on the task.

What also changed from last year is the level of satisfaction directors have with their company’s CEO succession plan. In 2012, nearly 80% of directors expressed “extreme” or “moderate” satisfaction — a substantial increase from 64% the previous year. Directors may have spent more time on CEO succession during the prior year as a result of media attention given to several high-profile CEO turnovers during that period. As a result, directors seem more comfortable with their company’s plan in the current year. Directors at the largest companies (more than $10 billion in annual revenue) are three times as likely to be “extremely satisfied” with their company’s CEO succession plan as those at smaller companies.

Increased scrutiny has been placed on the independence aspects of board leadership. Of the companies that have a combined Chair and CEO, about half of these boards are already discussing splitting the role at their next CEO succession, according to the PwC survey. The prevalence of these conversations suggests many directors are re-evaluating their board leadership structure—perhaps in response to continued shareholder activism against combining the role.

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