While boards of directors routinely engage in succession planning for the company’s chief executive, fewer have planned for a scenario in which the CEO dies, unexpectedly departs, or is temporarily or permanently incapacitated.  If a board takes the time in advance to think through key issues, resolve some threshold questions for how an emergency CEO transition would be managed, and request that management consider the filings and scripts that would be necessary, the company will be far better prepared to handle such a crisis should it occur.  Having a fully developed playbook, with protocols and documents ready to take off the shelf at a moment’s notice, can mean the difference between a full-blown crisis and a manageable situation.

Creating this playbook is likely to require uncomfortable conversations among board members and the chief executive.  No matter how young, healthy, and seemingly invincible a CEO may be, anything can happen at any time.  There have been high-profile examples of chief executives who have suffered accidents or medical issues that have temporarily incapacitated them, and others who have experienced professional or personal crises that have necessitated immediate resignation or replacement.  While no one will enjoy contemplating the potential misfortunes that may befall the company’s leader, an emergency scenario is likely to resolve in a manner more advantageous to the enterprise if it can be handled with the benefits of forethought and advance planning.  Involving a public relations/investor relations firm that specializes in crisis management can make it easier for the board to consider these difficult issues.

Recognizing an Emergency

As a threshold matter, an emergency scenario requiring an unexpected CEO transition must be recognized for what it is.  It is often unclear whether a scandal of a professional or personal nature is sufficient to require sudden resignation or a replacement.  This will be a decision for the board of directors, in consultation with legal and possibly other advisors, and must be evaluated on a dynamic basis as the situation evolves and more information becomes available.  Similarly, if a CEO suffers an accident or illness, it might not be entirely clear whether the CEO is able to fully perform his or her duties, and here too, the situation can be fluid.  For example, a CEO may be involved in a car accident resulting in injuries more severe and debilitating than they initially appear.  During the recovery period, the CEO may work from home effectively for a time, but gradually the CEO’s condition may deteriorate, and the CEO may not be fully aware of his diminished capacity.  If confronted, the CEO might resist the idea that he or she is unfit to continue in their role or insist that that the incapacity is temporary and can be managed.  In this example, a key question is who will participate in the determination of whether a CEO is in fact incapacitated to the point where it is necessary to remove him or her (and, by the same token, when/if the CEO is ready to return to work).  At minimum, this group should include the executive committee, if not the full board, with the advice of the chief legal officer and other advisors if needed.  If the CEO resists the determination of unfitness, the decision to remove the CEO, whether temporarily or permanently, should be taken by the full board.

In a medical emergency, the board should be able to have access to the CEO’s physician for evaluation of the CEO’s condition.  The CEO and board should discuss this ahead of time so that the CEO has the opportunity to execute in advance a release permitting the CEO’s physician to share their professional opinion and all relevant medical information with the board.  The CEO may not be willing to do so, but the CEO should be aware that in the event of refusal (or inability) to provide a medical release at a time when there is legitimate concern about the CEO’s fitness for office, the board would have to consider putting the CEO on leave until it is satisfied that the CEO is fully capable of performing his or her duties.

 Managing the Situation

Once an emergency involving a CEO occurs, the key question is which subset of the board and management will handle the situation in the early stages, which are likely to necessitate rapid decision-making and frequent consultations.  If there is an executive committee of the board, this can be their role; otherwise, it would generally be the nominating/governance committee.  While the entire board could take on this role, that may be cumbersome at a time when it is essential to take action quickly and decisively.  This determination should be established in advance as a board policy, along with the authorization to act as needed.

In this type of crisis, the company’s chief legal officer will be a crucial asset to the board and should be fully involved from the start.  The CLO will advise the board on the many legal issues that will arise and generally is the only person in management who has broad familiarity with all of the various fiduciary considerations at play.  There is likely to be a period of time during which very few executives are aware of the situation as it is developing, and the CLO will be invaluable in filling the various roles that are required  — communications, human relations, etc. — until the board determines that these other executives should be informed.  If the board has regular outside legal counsel, they can be consulted as needed.  Outside legal counsel may also be helpful in situations where a board is investigating the conduct of the CEO, where there is a threat of derivative litigation, or where the board needs independent advice regarding its fiduciary obligations.

The board must also be prepared to select an interim CEO.  The playbook may include one or more options for interim leadership, likely chosen from among the directors and top executives.  Having several options would allow for a circumstance-specific determination based on the needs of the enterprise at the moment at which the succession crisis occurs.  Additional factors to consider would include the anticipated duration of the interim CEO’s tenure and the viability of one or more of the candidates as the permanent new CEO if needed.  If there is no natural candidate to be interim CEO, it may be appropriate for the board to appoint an office of the CEO to support the interim leader selected.  The board may also wish to take into account the cause of the crisis; it is not inconceivable that a criminal indictment, personal indiscretions, or a medical emergency might, at the margins, point in favor of different choices for the interim leader to reassure stakeholders that the enterprise remains in good hands.  It is important to note that, if properly handled, an interim CEO who is also a director can regain the designation of “independent” when his or her term as interim CEO is complete.

It will be helpful to consider in advance whether replacing the CEO would trigger other legal obligations such as “key man” provisions in employment contracts, or consequences to other executive employment contracts of shifts in responsibilities due to the emergency succession, and to draft any needed amendments to these contracts.  It also may be helpful to consider in advance the compensation arrangements for the interim CEO.  In the event that the original CEO’s absence or incapacity shifts from temporary to permanent, the playbook should include a protocol for when and how to begin the implementation of a longer-term succession plan.

 Public Statements and Filings

There are a number of documents that can be prepared for the event of an unexpected CEO transition.  At minimum, the playbook should contain a draft 8-K, a draft press release, and a draft stock exchange filing if needed.  The playbook also may contain a crisis communications protocol for this situation, including a plan for who will lead the crisis communications team.  There can be a plan for how the news will be communicated, both internally at various levels of the organization, and externally to key investors, regulators, and other stakeholders such as strategic partners or major customers and suppliers.  Having a plan for when and how this outreach will occur, and in what order, and by which contact points, will be very helpful in the moment of crisis.  External public relations/investor relations firms can be invaluable in considering various scenarios and advance planning.  Draft scripts can be prepared for key people such as the board chair, the interim CEO, and certain members of management.  In the heat of the moment, everyone who is aware of the emergency CEO transition should be reminded that until the information about the situation is publicly disclosed, it is material non-public information and, per Regulation FD, must not be selectively disclosed until a public announcement is made.

A crisis of leadership is likely to reveal an organization’s strengths and weaknesses, information which ultimately can be used to create a stronger and more resilient enterprise.  In the aftermath of an unexpected CEO transition, planning for the next such emergency with the knowledge gained in the last one will enable directors and executives to be more effective if the need should again arise.