Wednesday, June 13, 2012

Sucession Planning and University Governance

A recent post,  On the Termination of the University of Virginia's President--More Aggressive Boards, Politicians, and Faculty May Reshape Governance of Public Universities,  and the sudden termination of Penn State's President Graham Spanier, remind us that the dynamics of presidential succession at public universities is both critically important and may be changing.  As great U.S. public universities begin to consider issues of sucession, it may be useful to consider the insights that may be useful from succession planning in the great U.S. public companies.  "Given the importance of the CEO role within a corporation and the potential disruption that can result from an unexpected loss or change in top leadership, succession planning is considered one of a board’s most important oversight responsibilities."  Melissa Aguilar, CEO Succession Planning:  Current Developments, Shareholder Activism, and Disclosure Practices, Director Notes:  The Conference Board, No. DN-V4N12 (June 2012).   

The Conference Board  "is a global, independent business membership and research association working in the public interest. Our mission is unique: To provide the world's leading organizations with the practical knowledge they need to improve their performance and better serve society. "  Conference Board, About Us.  Referencing Melissa Aguilar, CEO Succession Planning:  Current Developments, Shareholder Activism, and Disclosure Practices, this post suggests that university Boards of Trustees may be well advised to consider the importance of both creating a succession plan and to involve important university stakeholders participate in a transparent process of development.

Aguilar's article focuses on the development of succession planning and the wave of shareholder proposals that have been advanced to adopt and disclose written and detailed succession planning processes. The traditional approach for public companies (as it is now for public universities) was to avoid disclosure of succession planning processes to shareholders. Before the financial crisis of 2008, most companies were able to exclude shareholder proposals seeking disclosure of succession planning, with the acquiescence of the Securities Exchange Commission. All that changed in 2009. "In October 2009, the SEC staff issued a legal bulletin reversing its prior position, declaring that, 'One of the board’s key functions is to provide for succession planning so that the company is not adversely affected due to a vacancy in leadership.'” (Melissa Aguilar, CEO Succession Planning: Current Developments, Shareholder Activism, and Disclosure Practices, supra; citing U.S. Securities and Exchange Commission Staff Legal Bulletin No. 14E (CF), October 27, 2009 ("Going forward, we will take the view that a company generally may not rely on Rule 14a-8(i)(7) to exclude a proposal that focuses on CEO succession planning.")).  Aguilar also noted that
In addition, the Council of Institutional Investors adopted a new corporate governance policy on CEO succession planning in September 2011, which stated:
The board should approve and maintain a detailed CEO succession plan and publicly disclose the essential features in the proxy statement. An integral facet of management succession planning involves collaboration between the board and the current chief executive to develop the next generation of leaders from within the company’s ranks. Boards therefore should: (1) make sure that broad leadership development programs are in place generally; and (2) carefully identify multiple candidates for the CEO role specifically, well before the position needs to be filled. To that end, the plan should address both short- and long-term succession scenarios.  (Melissa Aguilar, CEO Succession Planning: Current Developments, Shareholder Activism, and Disclosure Practices, supra.).
As a result shareholders have sought to put pressure on companies to develop and disclose succession policies and processes .  Aguilar identified common features of the proposals:
--The board of directors will review the plan annually;
--The board will develop criteria for the CEO position, which
will reflect the company’s business strategy and use a formal
assessment process to evaluate candidates;
--The board will identify and develop internal candidates;
--The board will begin non-emergency CEO succession planning at
least three years before an expected transition and will maintain
an emergency succession plan that is reviewed annually; and
--The board will annually produce a report on its succession plan
to shareholders. (Ibid).
Though these proposals have met some resistance, some public companies have begun to adopt and disclose succession planning.  Aguilar offers a number of case studies to suggest the range of approaches now being adopted by corporations, and, more importantly perhaps, the growing strength of shareholder desire to see such plans implemented in soem form or other.

It is true enough that universities are not large for profit corporations.  It is also true that university stakeholders are not the same as large institutional shareholders and that universities do not face the same sort of market pressures.  Yet, universities are also large functioning businesses.  They require a certain amount of stability to maintain their operations at optimum levels and to ensure that the policies and programs are not unnecessarily affected by changes in top level management.  Programs of succession, or at leats the exercise of thinking through such processes, would be a quite useful task for university boards.  In that process, and because the university is distinct from profit corporaiotns, it makes sense for all of the crucial stakeholders--the state, the alumni and the faculty--to have a significant voice in the development and implementaiotn of such planning.

We can no longer operate effectively in a world in which succession can proceed languidly.  Universities do not have the luxury of operational interruption during an interregnum--the usual process in drawn out succession processes at universities.  Such interruptions tend to put university forward movement on hold, intensify administrative positioning and strategic behavior in advance of a permanent change, and add too great a level of uncertainty for faculty.  And neither Board nor administration ought to  go it alone.

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