Corporate Boards and Retained Executive Search Firms Can Partner to Assure "Transparent" Corporate Succession

A recent piece in the Atlanta Journal-Constitution about Coca-Cola's search to replace Chairman and CEO Doug Daft, who is retiring at the end of December, points up the challenges of corporate succession for boards of directors of public companies, private companies and cooperatives in the post-Enron world.

Finding qualified candidates to assume the reins of the world's most recognized consumer brand may be especially difficult. Among other things, Coke's ideal executive leader must be well grounded in the consumer foods business, possess international experience, understand "the mystique and pressure that comes with running the world's most famous company," and have a "thick skin."

Shareholders Demand Transparency

In the current President and Chief Operating Officer, Steve Heyer, who is a company veteran, Coke may have that suave, internationally adept, consumer foods expert with the hide of a rhino they're looking for. But even with perfect credentials, it will be extremely difficult for Coca-Cola's board of directors—or any company's board—to elevate insider candidates because, as we have discussed in prior e-Notes, the days of behind-the-scenes, cozy corporate king-making are being scrutinized and criticized as never before by institutional investors and regulators.

Due to the wave of Wall Street scandals, shareholders are demanding more transparency and openness from companies, while the Sarbanes-Oxley Act specifically mandates new, rigorous standards of corporate responsibility for directors and officers. From a practical standpoint, one of the more interesting consequences of Sarbanes-Oxley is that boards of directors of both publicly held and privately owned firms could one day find themselves duty-bound to conduct a formal search when filling the CEO position.Formal or informal succession plans notwithstanding, they would feel compelled to do this in order to demonstrate to the owners of the firm's equity and debt interests that they have made a concerted effort to objectively identify and select the most qualified candidate.

Disney Example

One of the main reasons nearly 50 percent of Disney shareholders pressed the board of directors to split the Chairman and CEO jobs was their expressed desire to have Michael Eisner held more accountable to the board of directors and to have a clear, "transparent" succession strategy in place. The operative word is transparent, as Eisner later acknowledged on ABC's "Nightline," when he attributed the separation of the jobs to the wider reforms underway in corporate America and said, "We should have been considering, and getting our company into compliance with contemporary corporate governance..."

As the Disney outcome illustrates, succession has been a component of corporate governance which has more typically been honored in the breech. However, choosing a company's top executive remains one of the board's of directors most important responsibilities. Defining the organization's long-term strategic vision and plans will dictate the talents required in the next CEO. In meeting its responsibilities, a board may be well served by bringing additional objectivity and in-depth industry knowledge to the task in the form of outside professional search services. This is true regardless of whether the company is a public corporation, privately held company or a cooperative organization.

Advantages of Retained Executive Search

With so much at stake and facing added scrutiny by, and potential liability to investors, boards of directors (such as Coke's) are retaining executive search firms to assure that they have made every effort to recruit the most qualified leaders. The retained search firm complements the board's efforts by bringing expertise, resources and impartial advice to the search process with a broad knowledge of available outside candidates and an ability to objectively evaluate internal candidates, and make appropriate recommendations. A board can feel more comfortable representing that they have selected the most qualified candidate, even when an internal candidate is elevated to the top position.

The leading retained search firms, which comprise a small minority of the thousands of recruiting firms operating throughout the world, are elected to membership in the Association of Executive Search Consultants. Members must pass a stringent professional standards review process and adhere to the AESC's Code of Ethics and Professional Practice Guidelines. Kincannon & Reed was admitted to the AESC in 1988.

At Kincannon & Reed, we are keenly aware of the added responsibilities faced by boards of directors as a result of Sarbanes-Oxley, and we are committed, as we have been for more than 20 years, to recruiting "best-in-class" executive leaders for companies that feed the people of the world and keep them healthy.

For further information about retained search, including our industry's very helpful Client's Bill of Rights, please link to www.aesc.org. Until next time, thank you for your continuing interest in Kincannon & Reed.

Kincannon & Reed
April 2004