Archive for the ‘Succession Planning’ Category

Succession Planning

Why is succession planning important?

Succession planning is seen as crucial to ensuring that a successor is in place to carry on the work of key individuals in a business should they leave the company in either a planned manner (e.g. retirement, job move, generational succession, or ownership changes) or an unplanned manner (e.g. fatal accident, unplanned removal from post). Sometimes the immediate successor is seen as a safe pair of hands, ready and waiting to carry on the work pending the appointment of another individual, whilst at other times there has been more time to search for a successor.

Investors are keen to know that a succession plan is in place for key directors to help ensure the ongoing smooth running of the business, its strategy going forward, and to maintain a steady steer at the helm, thus retaining investor and market confidence. The successor may also be appointed for their new ideas on strategy, whether that is to take the business forward into new spheres or to concentrate more on a few core sectors which may be more appropriate for the company at that time.

 

Corporate Governance Codes

Corporate governance codes mention succession planning in different degrees of detail.  Looking at a few of these, the UK, Japan, and Italy, illustrates this.

The UK

The current UK Corporate Governance Code (2016) mentions succession planning in the context of the role of non-executive directors, they ‘have a prime role in appointing and, where necessary, removing executive directors, and in succession planning,’ (A.4, Non-executive Directors, Supporting principle, UK Corporate Governance Code 2016, Financial Reporting Council); and in the context of Appointments to the Board ‘The board should satisfy itself that plans are in place for orderly succession for appointments to  the  board  and to  senior  management,  so  as  to  maintain  an  appropriate  balance  of skills and experience within the company and on the board and to ensure progressive refreshing of the board (B2 Appointments to the Board, Supporting principle, UK Corporate Governance Code 2016, Financial Reporting Council) https://www.frc.org.uk/getattachment/ca7e94c4-b9a9-49e2-a824-ad76a322873c/UK-Corporate-Governance-Code-April-2016.pdf

However the proposed revisions to the UK Corporate Governance Code (2017) cover succession planning in more detail.  Section 3 is headed ‘Composition, succession and evaluation’, and its Principle J states ‘Appointments to the board should be subject to a  formal, rigorous and transparent  procedure, and an  effective succession  plan  should  be in  place for board and senior management. Both appointments and succession plans should be based on merit and objective criteria, and promote diversity of gender, social and ethnic backgrounds, cognitive and personal strengths.’ Provision 17 states that ‘The board should  establish a nomination committee that should lead the process for appointments, ensure plans are in place for orderly succession to both the board and senior management positions, and oversee the development of a diverse pipeline for succession.  A majority of   members of the committee should be independent non-executive directors, with a minimum membership of three. The chair of the board should not chair the committee when it is dealing with the appointment of their successor,’ (December 2017, Proposed Revisions to the UK Corporate Governance Code Appendix A – Revised UK Corporate Governance Code) https://www.frc.org.uk/getattachment/bff48ee6-4fce-4593-9768-77914dbf0b86/Proposed-Revisions-to-the-UK-Corporate-Governance-Code-Appendix-A-Dec-2017.pdf

Japan

Japan’s Corporate Governance Code (2015) states that ‘Based on the company objectives (business  principles, etc.) and specific business  strategies, the board should engage in the  appropriate oversight of succession planning for the CEO and other top executives,’ (4.1.3, Japan Corporate Governance Code, Seeking Sustainable Corporate Growth and Increased Corporate Value  over the Mid- to Long-Term (2015), Tokyo Stock Exchange) http://www.ecgi.global/sites/default/files/codes/documents/japan_cg_code_1jun15_en.pdf

Italy

Italy’s Corporate Governance Code (2015) refers to the fact that ‘The Board of Directors shall evaluate whether to adopt a plan for the succession of executive directors. In the event of adoption of such a plan, the issuer shall disclose it in the Corporate Governance Report. The review on the preparation  of  the  above  mentioned  plan  shall  be  carried  out  by  the nomination committee or by another committee established within the Board of Directors in charge of this task.  Should the issuer adopt a succession plan, the Corporate Governance Report shall disclose whether specific  mechanisms are set forth in the succession plan  in  case  of  early  replacement, the corporate bodies and the persons in charge of the preparation of the plan as well as the manners and timing of its review.  As far  as the succession  procedures  are  concerned, the Committee believes that these procedures shall clearly define their scope, instruments and timing, providing both for the involvement of the Board of Directors and for a clear allocation of tasks, also with regard to the preliminary stage of the procedure,’ Appointment of directors, 5.C.2. Corporate Governance Code (2015) http://www.ecgi.global/sites/default/files/codes/documents/cg_code_italy_15july2015_en.pdf

Also in Italy in 2017, the Corporate Governance Principles for Unlisted Family-Controlled Companies were issued. Article 9 relates to Planning and Succession Plans going into some detail. On this issue, there are two Principles: 9.P.1. ‘Being  aware  of  the  differences  that  the  company  size  and  ownership  structure  involve,  it  seems appropriate for the members and the Board of Directors to ensure the continuity of corporate governance and  management  of  the  company  by  defining  precise  regulations  for  effectively  addressing  generational transitions or ownership changes.’ Also 9.P.2. ‘For  the  purposes  of  administration  of  the  company,  succession  plans  must  be  appropriately established  in  advance,  taking into  account  the  specific  conditions  of  the  company,  the  Group  and possibly the currently controlling family.’

Five application criteria are then listed which provide guidance on the process to be followed including the timeliness of establishing the process and having it ready in good time. Corporate Governance Principles for Unlisted Family-Controlled Companies 2017 http://www.ecgi.global/sites/default/files/codes/documents/principi_per_il_governo_delle_societa_non_quotate_a_controllo_familiare._codice_di_autodisciplina%202017%20English_0.pdf

 

Examples of succession issues in practice

For many family firms – large and small – succession planning is a real issue when either the next generation doesn’t want to take on the mantle of the founder, or there is no obvious successor.  Leo Lewis in his article ‘New prescription’ about Takeuchi Optical, a Japanese glasses manufacturer, highlights that ‘thousands of family-owned businesses in Japan face uncertain futures due to a lack of heirs,’  (Financial Times, 5th April 2018, page 9). Whilst Japan has a rapidly ageing society, similarly, other countries also face succession planning issues.

In South Korea, for example, Lee Jae-yong, vice-Chairman of Samsung Electronics and grandson of the group’s founder, was arrested in February 2017 on charges relating to bribery and corruption connected to a nationwide political scandal. Lee Jae-yong was convicted and sentenced to five years in prison on corruption charges. However in February 2018, he was freed on appeal with his original sentence being halved and suspended for four years. In April 2018, Samsung Electronics announced that it would split the roles of CEO and Chair but there will continue to be three co-CEOs with ultimate power still residing with Lee Jae-yong as vice-chairman. However Elliott Management, the activist institutional hedge fund, is seeking a change in the company’s corporate governance to limit the power of the family successor in waiting, Lee Jae-yong.

Chris Mallin

April 2018

Advertisements