We've been discussing CEO succession a bit in the context of the Mark Hurd drama at Hewlett-Packard. The sudden departure of the CEO left the board in something of a lurch, which could have been prevented if it had done its job regarding CEO succession. 

When it comes to Hugh Martin, CEO of Pacific Biosciences, the board is no doubt grateful for his courage in the face of cancer. He called an all-hands meeting and told employees: "I know what you are all thinking. We're getting bought. But that is not it. What I want to tell you is that I have a form of cancer called multiple myeloma, and before I continue, I want you to put down your iPhones and your BlackBerrys." Wow. Illnesses of this magnitude are tricky when it comes to top executives. 

Boards that are prepared put the company in much better shape when disaster strikes. McDonald's Corporation is often cited as a good model. In 2004, then CEO, Jim Cantalupo died unexpectedly in April. The board was able to name his replacement in an orderly manner just six hours later. When the new CEO Charlie Bell was diagnosed with cancer a few weeks later, the board again was able to make an orderly transition. 

The best example of how not to handle this may be Steve Jobs at Apple, who kept the world guessing for many months about his liver difficulties. He called it a hormonal imbalance, which caused weight loss and many absences. One director faulted his own board for keeping the illness private. The board likely had contingency plans to accommodate the worst possible outcomes, but why put your shareholders through all of that. At Pacific Biosciences, by contrast, the board can now operate in the open, not feeling at all defensive or stealthy about its decision to leave Martin as CEO and chairman but with plans in place to step in if he cannot handle the work load. It also accelerated plans to hire a CFO. 

It's fair to say the stakes are high when it comes to succession. Certainly, the legal and compliance stakes have been elevated. The SEC shifted its stance in 2009, away from allowing boards to use the "ordinary businesses exclusion" rule to prevent proposals about succession from appearing in proxies. In October 2009, an SEC staff bulletin (14E) formally encouraged more disclosure, effectively making poor succession policy a business risk. The agency wants more standards and processes put in place by boards and would like much more disclosed. Unfortunately, as of 2009, by one  measure only about 40 percent of companies had formal succession plans. My guess is that more have started to move in this area. 

At a minimum, the issues should be discussed at quarterly meetings, no matter how healthy or successful or upstanding the CEO is. All too often the CEO himself or herself is expected to drive this process, which may be downright uncomfortable and certainly unwise. More disclosure is a good idea right now. You may not have to spell out a policy that requires disclosure of an illness in the proxy. But you may want to clarify the steps you've taken to establish some processes. You may even want to set up a committee dedicated to this. In any case, you want to do something. 

All should be encouraged by the example of Hugh Martin. - Jim