SEC Issues New Guidance on CEO Succession Planning

During the past two proxy seasons, the SEC received a number of no-action requests from companies seeking to exclude proposals relating to CEO succession planning in reliance on Rule 14a-8(i)(7). These proposals generally requested that the companies adopt and disclose written and detailed CEO succession planning policies with specified features, including that the board develop criteria for the CEO position, identify and develop internal candidates, and use a formal assessment process to evaluate candidates. The SEC judged that these proposals could be excluded in reliance on Rule 14a-8(i)(7) because the proposals related to the termination, hiring or promotion of employees.

The Commission had stated in a 1998 Release that proposals involving "the management of the workforce, such as the hiring, promotion, and termination of employees" relate to ordinary business matters. Its position to date with respect to CEO succession planning proposals was based on this guidance and the historical approach to proposals relating to employee hiring and promotion.

In an October 26^th 2009 Release however it changed its position.  Reiterating 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, the Release read,  “Recent events have underscored the importance of this board function to the governance of the corporation. We now recognize that CEO succession planning raises a significant policy issue regarding the governance of the corporation that transcends the day-to-day business matter of managing the workforce. As such, we have reviewed our position on CEO succession planning proposals and have determined to modify our treatment of such proposals. 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.”

This change in position will most likely bring issues of CEO succession more prominently to the shareholder relations’ agenda and cause companies to more rigorously and transparently develop Succession Plans of consequence.