February 8, 2021

Succession Planning: Reassuring Investors with Disclosure

CEO succession has been near the top of business news cycles lately – last week’s news about Jeff Bezos stepping down as Amazon’s CEO certainly played a part. One key board responsibility relates to CEO succession planning. Investors expect boards to have a plan and when the need arises – to appoint a new CEO in due course. As boards need to deal with views of multiple stakeholders, one dilemma is what board should say to investors and a SquareWell Partners report says it found only 20% of companies that have appointed a new CEO since January 2019 provided comprehensive disclosure of their succession planning process.

Some companies aren’t in a position like Amazon – where the company’s announcement named Andy Jassy as incoming CEO. Jassy reportedly previously described himself as Bezos’ shadow – and the announcement also said Bezos will transition to executive chairman. To underscore the importance of CEO succession planning, the SquareWell report cites research that found companies that are unprepared to appoint a successor in a timely manner lose on average $1.8 billion in shareholder value. The report notes, when it comes to succession planning, it’s understandable that companies may want to hold their cards close to the vest, but investors want reassurance that boards are ready to act. Here’s an excerpt about succession planning disclosure that can help reassure investors:

There might be a misunderstanding that investors expect to learn the names of potential successors or to micromanage the choice of the next leader while what they actually want is to see evidence that the board is fulfilling its fiduciary duty and is ready to ensure a smooth transition for all scenarios.

Companies taking succession planning seriously should allow different executives to gain experience in engaging with investors. Investor focus should be on the frequency of the review of the succession plans and asking boards how they ensure that the pipeline of potential candidates and the successor profile are always aligned with the evolution of the company’s strategy. Investors could also question the company’s leadership development programs to understand how the leaders of tomorrow are being groomed. The quality of the board’s answers to these questions should reveal how prepared the board really is to face the next CEO transition.

For a look at trends in Russell 3000 and S&P 500 succession practices, Heidrick & Struggles and The Conference Board recently issued their “2020 CEO Succession Practices” report. The report discusses trends, the Covid-19 impact on succession planning and predicts that if company performance continues to be unsteady, it’s likely more boards will face the need to navigate a leadership change sooner than they might have anticipated.  And for more practical insights about CEO succession planning, check out the transcript from our webcast “CEO Succession Planning in the Crisis Era” – there you’ll find tips about disclosure issues and steps boards and advisors can take now!

Form 10-K Considerations & Reminders

With calendar year Form 10-K filings coming along, a recent Gibson Dunn memo walks through substantive and technical considerations to keep in mind when preparing 2020 Form 10-Ks. The memo covers recent amendments to Reg S-K, disclosure considerations in light of Covid-19, amendments to MD&A & financial disclosure rules and other considerations in light of recent and upcoming changes at the SEC. The memo includes a fairly extensive discussion of the new human capital disclosures and among other things, reminds companies to be mindful of what they’ve said about composition of their workforce in their CEO pay ratio disclosures. Here are a few other considerations, check out the complete 25-page memo for more:

KPIs: The SEC’s Interpretive Release issued in January 2020 was a reminder that companies must disclose key variables and other qualitative and quantitative factors that management uses to manage the business and that would be peculiar and necessary for investors to understand and evaluate the company’s performance, including non-financial and financial metrics. The memo reminds companies that if changes are made to the method by which they calculate or present the metric from one period to another or otherwise, the company should disclose, to the extent material, the differences between periods, the reasons for the changes and the effect of the changes. Changes may necessitate recasting the prior period’s presentation to help ensure the comparison is not misleading.

Covid-19 Impact on Risk Factors: It is important that the COVID-19 risk factor disclosure be appropriately tailored to the facts and circumstances of the particular company, whether due to (i) risks that directly impact the company’s business, (ii) risks impacting the company’s suppliers or customers, or (iii) ancillary risks, including a decline in the capital markets, a recession, a decline in employee relations or performance, governmental regulations, an inability to complete transactions, and litigation. The SEC has reiterated that risk factors should not use hypotheticals to address events that are actually impacting the company’s operations and brought enforcement actions against certain companies for portraying realized risks as hypothetical.[11] Accordingly, companies should be specific in providing examples of risks that have already manifested themselves.

Disclosure Controls and Procedures: In light of the substantial number of changes to the Form 10-K requirements and disclosure guidance, it is important for personnel and counsel to consider the manner in which the company’s disclosure controls and procedures are addressing the changes. It is also important that the disclosure committee and audit committee are briefed on the changes and the company’s approach to addressing them.

Transcript: “Glass Lewis Dialogue: Forecast for the 2021 Proxy Season”

We’ve posted the transcript for our recent webcast: “Glass Lewis Dialogue: Forecast for the 2021 Proxy Season” – it covered these topics:

– Proxy Season Review Highlights

– Policy Guideline Updates

– Board Diversity

– ESG Reporting

– Compensation

For those diving in to drafting a company’s proxy statement, check it out for insight into what Glass Lewis and the firm’s investor clients will want to see in this year’s disclosures.

– Lynn Jokela