Many financial institutions, broker-dealers and registered investment advisers follow industry best practices and regulatory guidance to include succession planning and a written succession plan as an integral component of the entity’s Business Continuity Plan (“BCP”) or Disaster Recovery Plan (“DRP”).  Past natural disasters and unexpected emergencies have savagely elevated the consequences of such events to federal, state and local governments, and both non-profit and for-profit businesses, charitable organizations, as well as closely-held family enterprises, law and accounting firms.

Succession plans have been considered a critical aspect of effective corporate governance. However, many firms and companies, particularly small businesses, don’t have a well-defined, written action plan to follow when planned and unplanned changes in leadership occur.

What will happen if your CEO or other key members of your firm’s C-suite management team contract coronavirus (“COVID-19”) and can no longer participate in the management and supervision of the company? Unfortunately, the ongoing pandemic has shown that no one is immune, including CEOs, top corporate officers, individual members of the Board of Directors or their trusted advisers/consultants or key parties of vendors/service providers. This pandemic illustrates how quickly disease can spread and over long periods of time where asymptomatic individuals are virus spreaders. ‘Business’ life, until now, has been a uniquely directly interpersonal “social” one involving personal contact, meetings, travel, and varied measures of socialization in both small and large groups in myriad environments. It’s imperative to have a Succession Plan in place to address the temporary (or even permanent) loss of key members of your company’s management team or others that are relied upon for key functions and advice. 

Key Components of a Succession Plan

There is no magical "one size fits all" succession plan. Nor is there an immutable founder/CEO. Rather, each firm’s plan must be tailored to the entity’s particular management structure and specific requirements of the organization operating in its industry and sector. There are several general considerations that can enable the succession planning to create a plan that is effective during a crisis.

Key Elements of Succession Plans

  • Current Organization Chart – detailed as to each member of management, including biographies, job descriptions/qualifications, chain of command/reporting lines – solid and dotted.
  • Legal, Regulatory and Compliance ‘matrix’ identifying each executive officer’s role and accountability in the organization corresponding to oversight, supervision or disclosure.
  • Successor Lists – at least two potential successors/heirs for each key managerial role, with biographies, current position responsibilities, qualifications and current reporting lines. Note: A successor’s elevation leaves a ‘hole’ in the organizations hierarchy that also needs to be filled!
  • BCP/DRP directions will impact the plan and need to be considered.
  • Documenting appointments and designations of authority.
    • Specification of mandatory/discretionary notifications to regulators, members of board, shareholders, stakeholders, press, etc.
  • Succession ‘tool kit’ – provides the organization with detailed steps and procedures to implement the plan and assure continued operations.

Purpose of a Succession Plan – Continuity Assurance

A well-developed succession plan ensures continuity in the management and operations of the company should a key player (or multiple high-level officers/managers) no longer be able to perform his/her or their duties. The Plan is also integral to maintaining the confidence of investors, business partners, lenders/creditors, clients, and staff.

  • Naming a successor: It can be difficult to find the “right” person to take over as the CEO of your organization or fill another key leadership role. With family businesses, the succession planning process and the Plan’s ultimate implementation is or becomes emotional, particularly if more than one child or other family member is interested in filling a role. In cases where time is not ‘of the essence’, it can be advantageous to leave decisions regarding succession candidates to a designated search committee or neutral third party. A line of multiple successors may be most appropriate to include in current Plans in light of COVID-19.
  • Planning for incapacity: Many businesses only prepare for the death or other sudden departure of key employees and do not account for the fact that unforeseen injury, a disease like COVID-19, or natural ravages of serious illnesses or age may render leaders mentally and/or physically incapable of making decisions or running the company. For small business owners, it is advisable to execute a power of attorney that appoints a trusted friend, family member, or business associate to act on your behalf, (e.g.. voting shares, executing contracts, initiating financial transactions). Another important issue is whether the Plan identifies “red flags” or signposts of incapacity that would trigger removal from office, whether temporary or permanent.  The Plan specifies about handling capacity issues are highly subjective, personal and require the expertise of professionals. 
  • Planning for Pandemic: This virus and its transmission requires a new depth of analysis involving all candidates for succession.  Due to the close personal relationships and teamwork among most family firms, partnerships, C-suite officers (and their staffs) it is now urgent to not only consider, but plan for a “wipeout” scenario that removes, either simultaneously or over a relatively short period of time, several levels of leaders and their identified successors.  “Bench strength” is routinely discussed and its benefits touted in athletic enterprises.  The “next woman/man up” considerations must be utilized in every organization. 
  • Calling in the experts: Many owners of enterprises fail to appreciate all the issues that must be addressed in a succession plan, including regulatory, operations/systems/technology, HR, financial and legal and tax implications. It is crucial to involve your key business advisors in the process, including your accountant, attorney, investment advisers, tax professionals, and insurance agents.
  • Creating a communication plan: When a succession occurs, businesses should have a communication plan in place to notify stakeholders, successors and reassure employees, customers, shareholders, and business partners that a smooth and orderly transition is underway. Team members responsible for messaging should be trained to provide timely notice about the Plan’s implementation and context.
  • Starting the transition process: The most effective succession plans appoint and train successor(s) before they are needed. Not every designated successor has the advantage of a training period where he/she can work directly with the current CEO (and full management team members) to “learn the role” through on the job training. Some Plans provide for “interim” or temporary successors until a robust candidate search can be undertaken. Other plans utilize a well-defined corporate structure listing identified internal successors not only for the C-suite, but for each department or business unit that is affected by the Plan. Allowing the new leader to take over responsibilities over time and while current executives are still available to provide guidance can help ensure a seamless transition, but that may not be possible. In this COVID-19 environment, the cruel facts of required critical medical care and probabilities of death reduces or eliminates opportunities for a consultative ‘stepping-up’ process.  Successors can expect to be immediately involved in crisis management issues that have not been previously considered. 
  • Keeping plans updated: It is important to periodically review the Plan and related policies, procedures, organization charts, etc. to verify that it reflects the firms’ goals. Illness, divorce, accidents, retirement, disability, disease and any number of other events require revisions to the Succession Plan. Many small business succession plans include buy-sell agreements under which the successor agrees to purchase the company upon a specific event, such as the death or incapacity of the owner. The current economic and health environment may have eliminated or rendered nugatory the underlying assumptions of valuation, financing and timing.

As the COVID-19 crisis highlights, it is difficult to predict when and how a succession plan may be required. However, a plan is mandatory and immediate attention should be paid to its current conditions. To protect your business, it is essential to have a comprehensive plan in place before you need it.

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Paul Lieberman, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.