April 7, 2020 Executive Compensation Resilience Articles

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Emergency Succession Planning in a Covid-19 World

Immediate corporate response to the COVID-19 pandemic rightly focused on employee health and safety, business continuity planning, and preserving liquidity as many businesses came to a halt. Now it is clear that the direct economic and social impact will extend into the summer and create a long-term change in habits and activity.

Board attention during crises is drawn by necessity to processing real-time information to support management’s time-critical business decisions. We believe that Boards must also make time to review key governance processes to understand and plan for new risks created by the COVID-19 pandemic. Emergency succession planning should be prominent in the Board’s discussion because of the increased likelihood of occurrence.

Emergency succession planning is different from longer-term succession planning. Dealing with one or even multiple executives no longer in their seat in short order requires Boards and other executives to be prepared to marshal resources, act quickly, and communicate with authority to employees, customers, and shareholders in the face of uncertainty. Immediate actions are critical. Effective emergency succession planning frameworks should address a variety of circumstances and allow Boards to use their judgment in what will likely be an environment that is difficult to predict.

We wrote about this topic 18 months ago in the context of #metoo and other ethics-related CEO terminations, Taking the ‘Sudden’ out of Sudden CEO Turnover. COVID-19 will create a separate set of issues, but the principles for dealing with sudden executive turnover are consistent. The Board should adopt key principles and test the strategy in order to act as rationally as possible to address whatever leadership challenges arise.

The three principles below generally apply to all good Board interaction, and are paramount in an emergency succession scenario:

1. Act in the long-term best interest of the company: A key tenet of Board leadership across all activities and the key to becoming comfortable with reactions to unforeseen events is ing the long-term interest of the company top of mind. Tying decisions and communications back to this principle gives authority to company actions and statements in difficult times.

The Board should be asking:

  • What work must go forward regardless of who is leading the company?
  • What are the critical roles that need an emergency plan?
  • How do we manage unavailability that may be temporary due to illness?

2. Think broadly about implications of change: Shifting roles creates a chain reaction through the organization as responsibilities are redistributed. Thinking through these ramifications in advance helps ensure that critical gaps are managed and that corporate infrastructure can shift to accommodate new requirements. This may require thinking differently about roles and responsibilities among the team based on available skills.

The Board should be asking:

  • Do internal candidates have the leadership skills to step into the breach and lead the company through a crisis?
  • What happens if we need to replace more than one executive?
  • How do we on course if we need an external candidate(s)?
  • What are reasonable timing expectations for internal and external candidates to become effective in a new role?
  • What support do they need in that period?

3. Prepare to communicate to customers, employees, and shareholders from a position of strength: Uncertainty is the enemy. Developing a communication plan and allocating responsibilities among directors and executives to speak on behalf of the company to customers, employees, and shareholders will help the company minimize confusion and disruption.

The Board should be asking:

  • What do our employees, customers, and shareholders need to hear right now?
  • Who should tell them?
  • What are our disclosure obligations?

Strategy and action items follow principles. Key specific steps to establish up front include:

1. Identify an interim candidate” and a back-up candidate” for key roles: COVID-19 highlights the need for multiple succession candidates for key roles. Executives likely are the best source of information about their emergency replacement and what skills and support that person will need to fill the role effectively. The interim candidate likely is from management, but may be from the Board. For example, a director may be called upon to serve as CEO, or the Audit Committee may step materially in to support a new CFO. The Board should also plan for replacement of Board leadership roles if needed. In each case, the candidate(s) should spend time with the current incumbent to ensure the transition is as seamless as possible.

2. Engage with the executive team: Succession candidates likely have been identified through the normal succession process. However, an emergency response requires more immediate knowledge of the executive team’s strengths, developmental areas, and relationships. Executives may need additional support in taking on additional roles from senior executives and Directors. HR, Investor Relations, IT, Legal, and Finance leaders should have ongoing input to ensure that information flows cleanly along a new leadership structure.

3. Do scenario planning exercises and create checklists: Create an exercise for the Board where they are faced with 3-5 different scenarios and allow some “white space” time for directors and relevant executives to have an open conversation. Develop notes and a checklist of action items and open questions from these discussions and solicit input from current executives to refine them. Incorporate specifics related to the current crisis e.g., employees working from home, furloughs, dramatic reductions in spending, and changing public perception. Refresh these as needed, but at least annually. These should have a broad view of potential outcomes, including:

  • Single executive, with particular focus on CEO
  • Multiple executives over a short period
  • Multiple members of single function, for example CFO and VP of FP&A
  • Concurrent loss of executive and emergency succession candidate

4. Prepare a communication plan: Communication will need to focus on external and internal stakeholders to reassure the company’s stockholders, customers, and suppliers, as well as calm employees in a tumultuous time. Investor Relations should develop and maintain communications plans to help the company control the messaging and deal with inbound media inquiries. Emergency communication plans should provide information to and support employees, customers, and suppliers directly impacted by the change. These plans should include:

  • Broad external communication: required disclosure, company website, press releases
  • Broad internal communication: town hall meetings, email
  • Small group communication: internal video conferences between managers and teams
  • Direct 1:1 internal and external conversations: among employees, and high-touch interaction with customers and suppliers

Pay strategy and disclosure requirements must be evaluated when a succession occurs. Usual approaches to compensation should be reconsidered as we all experience these unprecedented times.

Scrutiny on pay levels for external candidates always is greater in a time of crisis, especially if the company or candidate has a high profile. The CD&A and shareholder engagement become critical tools in communicating additional elements of the succession activity. There is significant room for creative compensation solutions to balance attracting someone to accept a challenging situation and providing incentives that are a fair use of shareholder resources.

Compensation for interim roles under typical circumstances is a well-worn path. The pay program for an interim candidate recognizes the additional responsibility the person took on and allows a return to the pay for the prior position when the person returns to the prior role. Temporary adjustments to salary, enhanced annual incentive opportunity, and/or special equity awards are all commonly used tools to recognize the expanded role and extra responsibilities an executive would take on in filling a temporary role.

In today’s environment, increasing pay levels for internal candidates may be impossible if the company has received federal assistance under the CARES Act. Regardless of restrictions, reluctance to change executive pay levels in the current environment will exist, especially for companies experiencing significant business disruption, furloughing employees, and/or reducing salaries to conserve cash. Under such circumstances, the executive’s contribution and time in the expanded role can be addressed through special cash bonuses or equity grants once a new normal is established.

The COVID-19 pandemic has highlighted the need for companies to prepare and test their emergency succession plan. By following key principles, testing against different scenarios, and having an action plan in place ready to launch when needed, Boards will be prepared to act quickly and decisively if the need arises.

View the full article as it was originally published.

Greg Arnold

Todd Sirras

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