The Business Roundtable long has been a leader in Corporate Governance thought leadership. They have written Principles of Corporate Governance going back to 2002. This is the ninth in a series of articles that summarizes their principles.
Long-term planning for CEO and senior management development and succession is one of the board’s most important functions. The board, its corporate governance committee or another committee of independent directors should identify and regularly update the qualities and characteristics necessary for an effective CEO. With these principles in mind, the board or committee should periodically monitor and review the development and progression of potential internal candidates against these standards, and see that internal candidates receive the necessary preparation.
The board should review the corporation’s succession plan at least annually and periodically review the effectiveness of the succession planning process. Emergency succession planning also is critical. Working with the CEO, the board or committee should see that plans are in place for contingencies such as the departure, death or disability of the CEO or other members of senior management to facilitate the transition to both interim and longer-term leadership in the event of an untimely vacancy.
The corporation should disclose information about the board’s succession planning process, either in the corporate governance principles or proxy statement or both. This disclosure can help facilitate shareholder understanding of the process that the board follows in planning for succession to the position of CEO. Under the oversight of an independent committee or the lead director, the board should annually review the performance of the CEO and participate with the CEO in the evaluation of members of senior management.
All non-management members of the board should participate with the CEO in senior management evaluations. The results of the CEO’s evaluation should be promptly communicated to the CEO in executive session by representatives of the independent directors and used by the compensation committee or independent directors in determining the CEO’s compensation.
— Steve Odland