Ask any board member whether they have an emergency succession plan and the answer is often, “Yes.” Dig a little deeper and ask, “What’s in it?” The response may surprise you. You will most likely learn the plan is comprised of two to three names and a phone tree. Ask to see it and no one seems to know exactly where it is.

Even as many organizations focus more diligently on succession planning, few consider the need to develop comprehensive emergency plans that address contingencies due to the unexpected departure of the chief executive officer. In fact, a 2009 survey of 600 respondents who work with or within U.S. public company boards found that 61% had no emergency succession plan in place.

Independent research and ratings agencies suggest that the lack of an emergency succession plan is among the key succession risks. Moreover, shareholders can require additional transparency with respect to succession planning as a result of the SEC’s recent change in position, now recognizing that “CEO succession planning raises a significant policy issue regarding the governance of the corporation that transcends the day-to-day business matter of managing the workforce.”

Mounting evidence depicts the degree to which companies are woefully unprepared to address leadership changes and protect the interests of stakeholders. Consider the following (drawn from Conference Board reports):

— CEO turnover is currently running at 14% per year; 1,227 CEO transitions occurred in 2009; — 46% of successions (in 2008) were unplanned; — 48% of directors currently see CEO succession as the sole responsibility of the CEO; — 57% of directors say that they do not know when their CEO plans to step down; — 40% of CEOs are fired or “retired” within 18 months; 64% never make it to their fourth anniversary.

Purpose of a plan

The purpose of an emergency succession plan is to ensure that the organization is able to achieve its strategic and operational goals and maintain effective relationships both within and outside the organization in the event of an unexpected departure of its CEO or other key executive. The plan is designed to address two unexpected situations:

– A permanent change in the CEO resulting from events such as a voluntary resignation, death, illness, disability, or termination. – A temporary absence lasting more than several weeks requiring the appointment of an interim CEO, resulting from events such as illness, a family emergency or death, or an unplanned sabbatical.

What board members need to know

The number of issues a board must handle in the case of an unexpected departure of a CEO is surprisingly large and sometimes complex, ranging from managing regulatory issues to communicating with employees (see box). Making decisions and putting the elements in place during a time of calm allows the board to make optimal choices that may be difficult during a time of crisis. The key elements of an emergency succession plan include:

1. A description of board responsibilities following an unexpected CEO departure, including committee responsibilities for managing the transition. When board members know in advance who has what responsibilities, they can begin taking effective action within hours of an unexpected departure.
2. A concrete plan for the appointment and compensation of an interim CEO, including advance board decisions about specific individuals who would be asked to take the role. A highly qualified interim CEO, whose role is clearly defined, will calm the fears of markets, employees, and other key stakeholders. With a good emergency succession plan in place, this individual can be named within hours of an unexpected departure.
3. A statement of the job accountabilities and profile desired in a new CEO (from a forward looking perspective) . Investors and other stakeholders will look for reassurance that the board has a plan that it can implement immediately for filling the CEO role on a permanent basis.
4. A plan for communication to all key stakeholders, including key messages and responsibilities. There are numerous stakeholder groups that have to be contacted when a CEO departs unexpectedly. Identifying the message and responsibilities before the need arises allows communication to happen as quickly as needed in an emergency situation.
5. Legal, regulatory, and governance requirements of the board following the departure of a CEO. From 8-Ks to responsibilities for capital expenditures to managing large contracts, there are legal and governance responsibilities that follow an unexpected CEO departure that need to be addressed.
6. A detailed timeline that the board can follow in discharging its responsibilities. The timeline is a critical tool for board members that allows them to exercise their responsibilities within the timeframe needed to meet legal obligations and assure various stakeholders.

Proper stewardship

Comprehensive corporate succession plans are fast becoming a critical element of good corporate governance. An emergency succession plan is one critical component of a broad succession plan for the company’s key executives that will ensure the smooth transition of leadership, reassure investors, provide transparency, and eliminate surprises that can interrupt operations when an organization unexpectedly loses its CEO or other key executives. Such a plan is an important part of the board’s fiduciary and stewardship responsibilities and will continue to be on the agenda of shareholders, creditors, regulators and others.

By Aaron Sorensen, Ph.D.

Originally published in Directors & Boards, February 24, 2016