Apple's not alone in succession plan woes
One major shareholder is pressing Apple to reveal Steve Jobs' successor at next month's annual meeting. To avoid that kind of showdown, smart companies are tackling the topic before they're forced to.
Apple has earned its reputation as a secretive outfit, keeping a tight lid on information about its inner workings and plans. So it's hardly surprising that a resounding silence has surrounded the question of who will take over as CEO if Steve Jobs' medical leave turns into a permanent retirement.
That may change on February 23, when the Central Laborers Pension Fund, a union in Jacksonville, Ill., that owns substantial Apple (AAPL) stock, will introduce Proposal No. 5 at the company's annual meeting. The proposal calls for Apple's board to spell out its criteria for choosing the next CEO and name internal candidates for the job (possibly including interim boss Tim Cook). It also demands that Apple begin a "non-emergency CEO succession planning" process and report on it to shareholders each year.
Apple is urging shareholders to vote against Proposal No. 5 on the grounds that spilling the beans on the succession question "would give the company's competitors an unfair advantage," in part by encouraging rivals to recruit "high-value executives" who aren't in the running.
But Apple may well have to bow to the Illinois union's wishes. The reason: Recent changes in SEC regulations have broadened legal definitions of risk, redefining CEO succession planning as fair game for shareholders demanding answers.
Not so long ago, a company under pressure to reveal its CEO succession plan "could blow off a request like Proposition 5 by claiming that executive succession was a routine business matter best handled by management, not something the board or the shareholders should be involved in," says Dave Heine, an executive vice president in charge of the directors and C-suite practice at Minneapolis-based leadership consultants PDI Ninth House.
Then, in 2009 and again in late 2010, the SEC issued rule changes that no longer allow companies to dodge the succession question.
"That opened the door to these Proposition 5-type actions from shareholders," Heine notes. "So more and more boards of directors are trying to get out in front of this, and they're often at a loss as to what to say and how much detail to disclose," Heine says.
Although Heine declines to say which of his Fortune 500 clients have sought his advice on this issue, he does allow that "our business in this area has gone up 200%" in the 14 months since the SEC began rewriting the script.
So what does he tell beleaguered boards?
"If you say nothing at all about CEO succession, investors get skittish," he says. "Apple could have avoided this whole controversy if they had shared some general information -- not necessarily naming names of potential successors to Steve Jobs, but outlining their criteria for selection and what they're doing to develop internal candidates."
With annual report season almost upon us, look for more of them to include a page or two about succession.
"Describing the process reassures shareholders, analysts, and employees that you do have one, even if you don't go into the kind of specific detail that could do you competitive harm," Heine says.
One important element of succession planning is "spelling out the challenges the current CEO has faced and comparing them with what the next one will have to deal with," says Heine. "Doing this shows that you have your eye on how your industry is evolving and how the marketplace is changing, and what that implies about the qualifications you'll need in your next CEO."
How do you replace a living legend like Steve Jobs? Says Heine, "You can't. But the good news is, you don't have to replace him because, going forward in such fast-changing times, the next CEO will probably need a different set of skills."
A knack for transparency might well be one of them.
