February 10, 2011

Recently, the Wall Street Journal published an article highlighting the importance of succession planning for the loss of a key member of a company’s management team, as Apple did when it tapped Chief Operating Officer Tim Cook to take over the day-to-day operations due to Chief Executive Steve Jobs’ medical leave. According to the article, a survey by the American Management Association indicated more than 20 percent of companies are not at all prepared for such an event.

Succession planning is even more critical now due to (1) the pending retirement of a large portion of the baby boomer working population, (2) the fact that businesses have reduced their workforces so there are fewer successors in the pipeline and fewer employees to absorb the workload if a successor is not named immediately, and (3) the complexity of products, markets, and technology which require advance planning to ensure a company’s continued success.

The goal of succession planning is to outline the procedures for the development and replacement of key personnel to enable a business to operate effectively when such key personnel leave the company. Succession planning is as much about the process and thinking that goes into the planning as it is about the final decision regarding who will be asked to run a company. To be most effective, succession plans must be specifically tailored to an individual company and take into consideration a variety of factors including the industry, size of the company, number of years in operation, management values, available time, and expense.

Although each succession plan should be specific to a particular company, there are common issues for developing, implementing, and disseminating such plans that can serve to guide companies through the succession planning process. This client alert provides an overview of such common issues to help businesses get started with their succession planning.

Getting Started – General Considerations

• Internal Research: If the company has gone through previous turnover at the management level, review such scenarios to learn from the company’s historical experience as to what was effective and what should be handled differently.
   
• External Research: Look at other companies and industries to obtain information and ideas about how to handle succession issues.
   
• Define Participants: Determine who will participate in the succession planning (e.g., only current management or individuals who may have a future role; will external consultants play a role).
   
• Establish Goals: Determine the company’s goals for implementing a succession plan (e.g., match succession strategy to business strategy, identify future leaders, and/or develop long-term retention procedures) taking into account the core values of your organization (e.g., ethical expectations for corporate culture including the way leadership should be exercised and work performed).
   
• Outline Scope: Determine the scope of the plan (i.e., whether it will address only the CEO, select management positions, or key positions on all levels; simple replacement or state-of-the art plan). In assessing the scope, determine whether the company should have individual succession plans for each office, each region, by country, or one overall plan.
   
• Establish a Budget: Prepare a budget for succession planning (e.g., hiring external consultants, training employees, salary of employees assigned to tasks, fees for legal consultation, and cost for insurance).
   
• Set Timetables: Establish timetables for developing, implementing, and disseminating the succession plan and assign specific people to each task or target goal. For example, one way to determine an appropriate timetable is to assess how long it takes to fill certain positions and then work backward with specific targets. Another way is to review retirement projections to determine what divisions or departments are vulnerable to large numbers of employees departing at the same time, and then look at the most critical first. Companies must be careful, however, not to use age or other protected factors, to make adverse employment decisions.

Providing the Details – Specific Considerations

• Workforce: Assess both present work requirements and competencies and future work requirements and competencies.
   
• Work Operations and Equipment: Identify key operations and equipment including who can access and operate such equipment.
   
• Work Information: Identify significant proprietary and confidential information including where such information is located, who knows how to access such information, and how to protect such information. This should also include capturing the company’s institutional memory (e.g., knowledge of customer/client needs).
   
• Lessons Learned: Evaluate why certain people plateau, fail assignments, or have results lower than expected to help them and others avoid similar problems and determine if there is a need for a systematic change.
   
• Attempt to Minimize Catastrophic Loss: Consider whether to include explicit policies to minimize the risks of losing an entire department or management team such as travel restrictions (e.g., CEO and CFO must travel on different planes) or restrictions on the number of key employees who may attend the same outside meeting or event.
   
• Short Term/Long Term: The plan should include a short-term plan (i.e., when a key employee is out for a temporary and limited duration) and a long-term plan (i.e., when a key employee is out permanently or for an indefinite amount and time and it is unknown if he or she will return).
   
• Filling Positions: Determine who will select a successor (e.g., committee or individual). This determination may depend on whether the organization intends to promote from within or from outside for the particular position identified in the plan. It can vary by position based on what is in the best interests of the business. A company may want to consider how key positions have been filled in the past to determine what has been most effective. Once it is determined how the company will select a successor, each position should include a plan implementation section (e.g., if a search committee selects, the implementation section could list who is on the committee, what the responsibilities are for each committee member, how to select for the new position, how many interviews there will be, who will do the reference review, and ways to assimilate the successor into his or her new role with the company)
   
• Legal Considerations: The development of any succession plan should take into consideration the impact of any applicable federal and state laws. For example, the Sarbanes-Oxley Act prohibits public companies from making personal loans to executives, a practice previously utilized as a retention strategy for key executives. In addition, some entities (e.g., government agencies) prohibit naming individuals to fill positions or require all job openings to be posted. Further, family-owned businesses and small businesses may want to consider tax and inheritance issues in their planning, as well as how to transfer stock ownership in the event of divorce or inability to act.
   
• Insurance: Companies should review their business insurance with their attorneys and their insurance agents. Having adequate insurance is one of the most important (and generally one of the most cost effective) ways to provide protection.
   
• Consider Alternative Approaches: Companies should consider whether options other than naming a particular successor are feasible such as delegating the work among other employees, reorganizing the job to be done in a new way without replacing the person, outsourcing the work, or moving employees from other locations in the company.

Living with the Succession Plan – What to Do After the Plan is in Place

• Mentoring: Develop a formal procedure for mentoring junior employees. This will help identify future candidates for management positions, pass on institutional information, and ensure consistency of company values and ethics.
   
• Training: If your company’s succession plan includes delegating duties among other employees, it is beneficial to include some training on any anticipated work before the employees are expected to perform such work. A formal training program will help fill in gaps in employees’ knowledge, assist with temporary vacancies, and prepare employees for future succession roles.
   
• Dissemination: Determine the degree of dissemination (e.g., open or closed; limited to top management). Public companies may want to consider what, if any, information to convey to the public to help stabilize any impact on stock prices.
   
• Periodic Review: Conduct a review that is triggered by a date (e.g., annual) or tied to an event (e.g., shareholder meeting) to reevaluate the plan and make any necessary adjustments.

Succession planning can provide companies with significant stability, and control over their future. The attorneys at Hill Wallack LLPare available to provide advice and guidance on succession planning for your company.

About Hill Wallack LLP

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Learn more at  Business & Commercial Services and Employment & Labor Law

For more information, contact one of the attorneys who work in this area:

In Pennsylvania: Francis J. Sullivan, Esq., Timothy J. Duffy, Esq., L. Steven Pastor, Esq., Carolyn M. Plump, Esq.

In New Jersey: Joseph A. Vales, Esq., Paul N. Watter, Esq.

This article provides information of general interest and is not intended, and should not be used, as a substitute for consultation with legal counsel. Any questions regarding the specific issues raised in this article should be directed to the authors or to your contacts at Hill Wallack LLP.