As the COVID-19 pandemic continues to spread in the U.S. and abroad, public companies are grappling with the ramifications (real or potential) of a senior executive(s) contracting the virus.  Together with senior management, boards of directors should be actively reviewing their emergency preparedness plans, including their emergency succession plans for key executives.  Boards also need to proactively address the possibility that one or more directors become sick, including by reviewing the board’s contingency plans to ensure the board will be able to continue to perform its duties.

In advising clients, we have identified ten key questions that directors and senior managers may want to consider in reviewing and preparing emergency succession plans.

  1. Is there an emergency—as opposed to long-term—succession plan in place?
    • A long-term succession plan developed pre-COVID-19 may not be responsive to the company’s immediate virus-related needs, and the board should be discussing with senior management whether and how to update the company’s succession plans or implement a more flexible emergency plan responsive to the current circumstances.  As part of this process, the board should review the company’s by-law and other governance documents to determine what, if anything, they provide for in respect of succession.
  1. What roles should an emergency succession plan cover?
    • A company’s succession plans should in any circumstance cover its most senior executives (e.g., CEO, CCO and CFO). However, other executives in a broader range of departments (including those outside of the C-suite) may be critical to a company’s management of the current crisis (e.g., IT, health and safety task force, business continuity).
    • Additionally, are there succession plans for directors? This may be particularly relevant where investors, especially large institutional shareholders, view director succession generally or a specific non-executive director as particularly important (e.g., a former CEO who has only recently transitioned out of the role, a lead director where there is a joint CEO/Chairman or a board chair brought in to help steady investor confidence in response to a crisis).[1]
  1. Have appropriate successors been identified in light of the circumstances, and do they know who they are?
    • Companies are dealing with a drastically different business landscape, including a likely period of prolonged market volatility, and this may have shifted the key skills and knowledge a company’s executives will need now or in the future. For example, have the company’s key priorities shifted (e.g., a particular business line may have expanded or receded in importance) or are there different current and long-term needs?  Is there a likelihood that the company will benefit from particular skills in the crisis or after (e.g., ability to negotiate capital infusions from new equity partners or a restructuring of all or a part of the business)?  Where there is a temporary, emergency need, an internal candidate might be most suitable, despite the fact that a company might additionally consider external candidates for longer-term succession planning or after a temporary appointment.
    • Management and boards should ensure that potential successors know who they are, and are up to speed on the company’s situation, as well as the company’s emergency succession plan, as they may need to step in quickly.
  1. How many successors to a particular position should be identified?
    • While often the case for long-term succession planning, identifying a sole successor to a particular position may be a concern during a pandemic due to the broad risk of infection.
  1. What is the plan for multiple incapacities in the C-suite?
    • Effective long-term succession planning often takes into account a relatively stable senior management team who can help ease any transition-related disruptions. However, in a pandemic multiple executives may develop symptoms simultaneously, especially if senior executives and/or board members are unable to abide by social distancing policies.  In this case, the board may need the authority to implement emergency, temporary appointments (which may include members of the board itself), and should be prepared in advance as to the potential candidates and what the terms of any such appointment may be.
  1. What other measures should the board consider when developing an emergency succession plan?
    • The board should work with senior management and its outside advisors to identify particular measures that can be taken to mitigate the risk of a member of management becoming incapacitated and incorporate those measures into its emergency preparedness plans. In the current environment, these would include measures like ensuring senior executives are able to seamlessly and effectively transition to remote working,  adopting senior management social distancing and separation plans that can be implemented swiftly and effectively, and analyzing the current duties and responsibilities, as well as geographic concentration, of key executives and whether existing allocations pose a particular risk and may warrant adjustments.
  1. Is the Board prepared to act quickly?
    • The board should be ready to quickly act on a succession plan. The board may want to consider whether an existing or ad hoc committee should be authorized to make decisions and act on interim appointments.  A small nimble committee will alleviate the necessity of convening a full board meeting or requiring the board to act by unanimous written consent when speed is needed and action may be difficult (if a director is suffering illness or for other reasons).  An existing nominating and governance committee, risk committee, executive committee or a subcommittee thereof could be considered for this task.
    • Internal reporting chains need to be maintained so that the board is kept abreast of any and all relevant developments, even in instances where delegation of authority is given to a committee. Companies should have in place formal emergency contact procedures for any potential trigger to a succession plan (e.g., a relevant executive reporting symptoms), including a list of who is contacted and when, who is responsible for initiating such contact (including backups) and up-to-date contact information for senior management and board members.
    • Advance consideration should also be given to whether a company’s bylaws permit emergency meetings of the whole board and any required notice provisions in the event action by unanimous consent is not possible due to illness of a director.
    • Boards should also familiarize themselves in advance with the potential legal ramifications of emergency succession on the business. For example, are there any “key man” provisions tied to senior executives that could trigger liabilities or obligations?  What is the potential impact of succession on executive employment agreements?  Are there other legal or regulatory considerations to take into account?
  1. How will developments be communicated internally?
    • Effective communication strategies remain paramount during challenging times, and companies should be prepared to timely communicate any changes in leadership, ensure internal stakeholders are informed and emphasize the company’s confidence in any new leadership.
    • Prior to public disclosure, any information relating to senior executive illness may be considered material non-public information and confidentiality should be stressed at all times. Boards and senior management should consider whether to close any trading windows until the information is disclosed or the executive has recovered.  For more on this topic, see our discussion of the SEC’s recent statement on the matter here.
  1. What about externally?
    • Once an emergency succession plan is triggered, public disclosure requirements, such as Form 8-K for U.S. public companies, may apply depending upon the role of the replaced executive. Regardless of regulatory requirements, a press release or other official announcement may be warranted.
    • However, when an executive first reports symptoms of, or is diagnosed with, a COVID-19 related illness, the company ultimately has a fair amount of leeway in deciding whether to publicly disclose such a development.[2] While public companies have already begun disclosing instances of C-suite executives contracting COVID-19, companies may well reasonably conclude that an executive testing positive or experiencing milder symptoms is not a material event justifying disclosure—a self-isolating executive may be able to continue his or her duties without serious interruption.
    • Any disclosure should aim for accuracy and transparency, as well as a demonstration that the board and the company are in control of the situation. While there are legitimate concerns around the depth of disclosure, saying too little can exacerbate the situation.
    • As always, if an illness is considered material but not immediately publicly disclosed, boards and senior management of public companies must also pay attention to selective disclosure prohibitions. This is particularly important where communications with shareholders and other external stakeholders may be more frequent in light of current circumstances.
  1. How will current events inform future behavior?
    • Areas of succession and emergency preparedness are likely to be topics ripe for investor focus in next year’s proxy season. Taking actions now to address any issues raised in a company’s COVID-19 response can help to manage those developments.  Companies should be aware that:
      • The SEC has recognized CEO succession planning as a significant governance policy issue that potentially transcends the day-to-day business of managing employees and workforce. Shareholder proposals relating to CEO succession planning and disclosure cannot typically be excluded from annual meeting proxies on the basis that they deal with a matter relating to the company’s ordinary business operations.[3]
      • ISS and Glass Lewis both advocate for disclosure of appropriate and pertinent details of a succession plan. ISS will recommend in favor of proposals seeking disclosure of a CEO succession planning policy, but consider the reasonableness/scope of the request and the company’s existing disclosure.  Glass Lewis’s voting guidelines take a similarly balanced approach to CEO succession and provide that they may consider recommending support for well-crafted proposals requesting companies adopt policies or provide shareholders with more information regarding CEO succession planning, however will generally not recommend supporting such proposal if the rigidity of the proposed requirements could unduly hinder the board’s ability to approach CEO succession in the way it deems appropriate.
      • Major institutional investors expect boards to address emergency succession plans outside times of crisis as part of the succession planning process and to disclose aspects of the plan or planning process in order to give investors comfort (without undermining the plan’s effectiveness).[4]
    • Boards should add annual review of emergency succession plans to their agenda, and should assess the readiness and effectiveness of the company’s overall emergency preparedness plans (e.g., emergency succession, communicable disease policies and business continuity plans). Any emergency preparedness plans should be flexible and adaptable to changing circumstances, as well as rapidly evolving best practices and prior lessons learned.

If you have any questions or would like to discuss this, or other topics relating to the coronavirus outbreak, further, please do not hesitate to reach out to your regular contacts at the firm or contact our COVID-19 task force directly by clicking here.[5]

[1] See, e.g., CalPERS’s Governance & Sustainability Principles (Sept. 2019) (recommending that boards engage in routine director succession planning).

[2] There is no specific rule requiring such disclosure, so the disclosure obligation is governed by Rule 10b-5, the antifraud provision of the Securities Exchange Act of 1934.  However note that a company cannot recklessly or knowingly make a material misstatement of fact or omit a material fact essential to making the company’s statements not misleading (i.e., no half-truths) which may, depending upon other disclosures being made, result in a determination that disclosure of an executive illness is warranted.

[3] See, Securities and Exchange Commission Staff Legal Bulletin No. 14E (October 27, 2009).

[4] See, e.g., CalPERS’s Governance & Sustainability Principles (Sept. 2019) (recommending a CEO succession plan also encompass “short-term perspective to address crisis management in the event of death, incapacitation or untimely departure of the CEO,” and that the plan be “disclosed to shareowners on an annual basis and in a manner that would not jeopardize the implementation of an effective and timely CEO succession plan”).

[5] This article was prepared with the assistance of Graham Richard Bannon.