Steve Wynn. Travis Kalanick. Laurent Potdevin. If these names sound familiar, it may be their connection to some of the nation’s top companies – Wynn Resorts, Uber and Lululemon respectively – that had what some call “forced transitions,” or departures from their roles because of serious ethical issues.
So what should a company do when there is a sudden or unexpected loss in leadership that leads to a crisis in succession? It’s something every company needs to think about collectively and likely something a business will have to confront in different ways, according to attorneys Cynthia J. Cole and Amy Conway-Hatcher.
Transitions because of issues such as sexual misconduct, harassment or abuse allegations that became public can force boards and leadership to make difficult and quick succession decisions under the glare of negative media attention and questions about the company’s future, the two lawyers for Baker Botts in Palo Alto.
Studies have shown that leadership transition planning, while it remains a critically important board function, is often ignored, Cole and Conway-Hatcher say. That is because it is a challenging and time-consuming process, and the topic is uncomfortable and difficult to discuss – especially with a Rockstar CEO or company founder.
This comfort zone, however, fails to accept that when life happens and an unexpected transition occurs, it is the most critical and time sensitive issue for the company, and it is often accompanied by a hailstorm of uninvited media attention and public scrutiny leaving no time for lengthy deliberation, searches, debates on strategic company objectives or disagreements on collaboration., Cole and Conway-Hatcher say.
Small businesses, especially those that are family owned, face additional concerns. What do you do when you are related to the CEO or leader that is facing dismissal because of an ethical breach?
“A small family owned business situation even further highlights the need to have policies in place that are neutral and objective, with oversight by more than one person. And, ideally, to have an objective third party take the pen in drafting the policies and then again in the handling of any sensitive situation,” Cole says.
Cole was the general counsel and suddenly became the CEO of Spectra7 Microsystems when company founder and CEO Tony Stelliga died suddenly in 2016. She is now Special Counsel at Baker Botts, representing global companies, startups and private equity in complex strategic business transactions, technology and commercial, data privacy especially GDPR compliance for U.S. companies and big data.
Conway-Hatcher is a litigation partner at Baker Botts and a former federal prosecutor. Her practice focuses on corporate investigations, crisis management, and compliance and white-collar matters, including defending corporate and individual clients in criminal and civil enforcement matters before the Department of Justice, the Securities and Exchange Commission and other federal and state enforcement authorities.
The following steps should be top of mind for general counsel who can assist their boards by providing an outline and an implementation strategy to get the discussion moving in the right direction.
Plan Ahead for Emergency Successions
Advance planning will stabilize an organization faced with a dramatic change in corporate leadership and it will give stakeholders less uncertainty to worry about. It may be obvious to say but until you have lived through it, you cannot underestimate how tumultuous a sudden shift in leadership is. It is emotional and creates an intense sense of personal loss among employees, executives and board members. In cases where a CEO steps down or is transitioned due to scandal, the company is faced with the crush of media attention and financial instability. Tensions run high. Fingers are pointed. Stakeholders are skittish. And other executives wonder if they are next to go. In these situations, it is critical to focus on a message of stability and a positive future vision – steps that are virtually impossible without foresight and planning.
Build Sustainable Leadership
Leadership succession planning is critical to any company’s long-term success. When done correctly, it does takes time and effort but it does not have to be overly burdensome. Succession planning can become part of the management review and compensation process. It can be done in multiple steps over a longer time period, several quarters for example, with critical issues addressed first and less important issues later. The importance is to keep it top of mind and moving forward. With the general counsel’s assistance, the board should assume responsibility for the development of a plan that provides a procedural roadmap and takes into account key internal and external considerations. Take the time to groom potential internal candidates to encourage growth, development and opportunity while keeping an eye on maintaining stability if the worst happens. Ideally, the board should pre-designate an executive who can serve in an interim (or potentially permanent) capacity in the event of an unplanned transition.
Understand and Adopt Critical Elements of a Succession Plan
While there is no uniform checklist or playbook for these types of situations, the gold standard includes putting together a checklist of interim leaders, mission-critical decisions, as well as required and advisable notifications. Overall, it is important to know who will be driving interim decisions, what decisions need to be made in the short and medium term, the appropriate governance, corporate and other legal rules to follow, and how any decisions will be communicated (internal and external). Of course, make sure any checklist includes details like personal phone numbers of key stakeholders. An often-overlooked component of the plan is the identification of critical external stakeholders and possible contractual triggers associated with those relationships. The external stakeholder list can and should include a wide-ranging audience with different interests and needs for information and may include management, employees, clients, vendors, investors/lenders, regulators, the public and the media. Finally, any succession plan should align with existing crisis management and communications plans.