Hiring Senior Executives and Executive Transitions

Transcription

1 Hiring Senior Executives and Executive Transitions September 19, 2017 Kelly Sullivan Joele Frank Daniel S. Laddin Compensation Advisory Partners Henry I. Morgenbesser Katzke & Morgenbesser LLP Adam J. Shapiro Wachtell, Lipton, Rosen & Katz Agenda Hiring Senior Executives Employment Agreements Managing Executive Departures Disclosures/Communications 2 : Overview Background Purpose Rules of the Road Case Studies Practical Issues Involving New Hires 3 1

2 Background (1) Last year the CEO succession rate increased 5%, from 12.2% in 2015 to 17.1% in In 2016, CEOs of poorly performing companies had a 40% higher probability of being replaced than in 2015 and a 60% higher probability of being replaced than CEOs of betterperforming companies. In 2016, 86% of incoming CEOs were insiders. 10% of CEO successions in 2016 involved an interim CEO. Smaller companies less likely to have a ritualized process. (1) Background statistics courtesy of The Conference Board CEO Success Practices Report, 2017 edition 4 Fun (and not so fun) Facts (1) Youngest CEO in S&P 500 Mark Zuckerberg, 31 Oldest CEO in S&P 500 Warren Buffett, 86 Female CEOs in S&P Only six of the 63 CEO positions that became available in the S&P 500 in 2016 were filled by a woman. The cost of succession to a company is estimated to be 5% of a company s annual profit. Costs include the cost of the candidate search, severance pay, and other soft costs such as loss of firmspecific knowledge that must be acquired by a new CEO. Outgoing CEOs also incur costs. Only 5.5% of exited CEOs under the age of 60 are hired as CEO at another public firm. And these executives receive compensation that is approximately 24% lower than when they served as a CEO. (1) Courtesy of The Conference Board CEO Success Practices Report, 2017 edition. 5 Purpose Prepare for crisis scenarios (sudden death or departure of CEO) Minimize costs and impact of leadership transitions Promote internal talent development Reassure investors, rating agencies and governmental entities that the company is well prepared for a succession scenario Minimize risk of a hostile takeover attempt Minimize risk of being targeted by activist shareholders 6 2

3 Rules of the Road the Role of the Board Based on survey data, boards are not adequately prepared for succession To prepare for succession, it is generally recommended that boards: Consider selecting a board member with succession experience Collaborate with successful CEOs during the succession process Actively identify talented leaders to create a bench of qualified internal and external candidates Routinely consider succession for other critical positions Mentor internal candidates 7 Rules of the Road Annual Reviews Comprehensive annual review Led by CEO Review strength of internal candidates Plan for succession beyond the CEO position Identify desirable traits, experiences and characteristics in potential executive candidates Plan for emergency succession scenarios 8 Rules of the Road The Executive Search Process Leadership Identify Roadblocks External Assistance Source of Candidates Managed by CEO, when the CEO departs on good terms Otherwise, managed by the lead independent director of the board Identify and work around key impediments such as: Lack of candidates Timing Strained relationship with prior CEO Retain outside party to perform background checks and verification Consider retaining an executive search firm and/or outside counsel Boards tend to prefer external candidates Internal candidates are often lower risk 9 3

4 Case Studies: Starbucks Gold Standard Planning In 2015, Starbucks CEO and company founder Howard Schultz hired Starbucks board member and Juniper Networks CEO Kevin Johnson as Starbucks President and COO Schultz got to know Johnson based on his board service and was impressed Disclosure In December 2016, Starbucks announced that Johnson would assume CEO role and Schultz would become executive chairman on April 1, 2017 Transition Johnson had 7 years of experience as a Starbucks board member and 2 years of experience as COO and President of Starbucks Succession occurred following the 3 month transition period Outgoing CEO remains a valuable resource executive chairman 10 Case Studies: Wells Fargo Company Misconduct Misconduct Customers received products and services they did not request. On September 8, 2016, Wells Fargo announced that it entered into settlements with regulators totaling $185 million. Company initially terminated managers and team members but senior leadership remained intact. Investigation On September 27, 2016, Board launches an investigation. Board Chairman and CEO John Stumpf recuses himself from the investigation. Mr. Stumpf testifies before Congress on September 29, Action CEO initially retained his position, but gave up $41 million of unvested equity awards, his base salary during the investigation and his 2016 bonus. On October 12, 2016, Mr. Stumpf retired from the Company and the Board. Company President and COO Tim Sloan succeeded Mr. Stumpf as CEO, and Lead Director Stephen Sanger became non executive Chairman of the Board. 11 Case Studies Uber: CEO Succession at a Startup Founder CEOs Present Unique Succession Challenges A successor has a better chance of succeeding when his or her predecessor supports the succession decision. A founder must allow the new leader to take full ownership of the role. Important to preserve the unique and valuable input of the founder. Corporate Culture/Misconduct as Impetus for Change On February 27, former Uber engineer reports sexual harassment and gender bias. Uber initiates an investigation led by board member Arianna Huffington. On February 28, video of CEO Kalanick shouting at a driver becomes public. In March Uber releases disappointing employee diversity numbers. On June 6, Uber fires 20 employees after investigation revealed 215 claims of misconduct. On June 8, leak of Kalanick to employees explaining how to handle sex and drinking. 12 4

5 Case Studies Uber: CEO Succession at a Startup (cont d) Path to Leadership Change Board Dysfunction and Leaks Impede Succession Process On March 7, Uber launches COO search after Kalanick admits he needs leadership help. On June 13, Kalanick announces leave of absence. On June 13, another board member resigns after making a sexist joke. On June 20, Kalanick resigns. Uber announces hiring of Expedia CEO Dara Khosrowshai on August 29. Kalanick remains on the board of directors. Chief Legal Officer and General Counsel announces resignation in September. Board Dysfunction and Leaks Impede Succession Process Search is fraught with infighting among board factions and leaks. Investor Benchmark sued Kalanick saying that he had committed fraud, breach of contract and breach of fiduciary duty in his efforts to maintain control. Other Uber directors expressed frustrations with Benchmark s lawsuit. Company leaks reveal candidacy of Meg Whitman and Jeff Immelt. 13 Case Studies Activism threat Accelerates Departure Jeff Immelt at General Electric No CEO is bullet proof Even a CEO of Jeff Immelt s stature was vulnerable Hedge fund Trian Partners had acquired a multibillion dollar stake in GE, though they had not formally called for change at the top Succession announcement on June 12, effective August 1, with Mr. Immelt serving as Board chair through year end. GE s communications plan emphasized the long term nature of the company s succession plan and GE disclosed a one page time line demonstrating its long term plan Plan in place since 2011 Targeted summer 2017 succession Comp Committee dedicates portion of every meeting to CEO succession Consideration of internal and external candidates Multiple board meetings to refine plan Internal candidates receive coaching from incumbent CEO 14 Practical Issues Involving New Hires Terminating the Existing CEO Hiring the New CEO General How to characterize the termination Involve litigators if there is potential wrongdoing Risks involved in paying more than is due Candidate will look at current CEO and market compensation for guidance Replacement equity/deferred compensation Inducement exception Process considerations Involve compensation consultants and PR firm early in the process Disclosure issues Importance of confidentiality 15 5

6 Term of agreement Description of position Compensation and benefits Termination rights and severance Restrictive covenants Customized issues for lateral hires Other considerations 16 Term of Agreement Fixed term Evergreen term Single extension Open ended term (offer letter) 17 Description of Position Title Duties Responsibilities Outside activities Designee/interim role 18 6

7 Termination Rights and Severance Termination events Good Reason and Cause definitions Contract non renewal as Good Reason event Cash severance (base, bonus and other?) Other severance benefits (equity and pension acceleration) Timing of payment/irc 409A considerations Golden parachute excise tax treatment (public vs. private) 162(m) Considerations Release (pre and post CIC considerations) 19 Restrictive and Other Post Employment Covenants Non competition Non solicitation of customers/clients/vendors/consultants Non solicitation of employees (longer period than non compete?) Non disparagement mutual? instructions vs. commitment? Confidentiality (carve outs) Intellectual property Litigation/investigation cooperation and support (carve outs) Transition/consulting 20 Issues for Lateral Hires Confidentiality Equity compensation forfeited by former employer/make whole by new employer Mid career pension make whole (if applicable) Mid year move/bonus make whole and guarantee Change in control/golden parachute excise tax concerns Restrictive covenants with former employer Compensation components subject to board/comp committee approval/make whole payments if no approval Background and drug screening checks timing issues 21 7

8 Managing Executive Departures Disclosure and Communications Issues Public company disclosure press release, 8 K, notice to exchange What action triggers disclosure? Public registrant Formal notice of termination given by employer or executive 8 K filing Timing Contents Notice to stock exchange 22 Managing Executive Departures Communications Issues Communicating the news Planned v. unplanned Role of outside firm Develop communications strategy Key materials internal and external Third party supporters Visuals Timing 23 8