Smooth CEO Succession Is a Test of Good General Counsel Planning

Few decisions are as consequential as the selection of a company’s CEO, and successful leadership transitions are driven by board readiness.

Insufficient planning leaves directors unable to manage leadership changes effectively and makes them vulnerable to pressure from activist investors. An effective in-house counsel can help assure directors that the company is prepared in the event of a sudden leadership transition.

General counsel should be aware of recent shareholder activism trends, key considerations, and effective practices that can help guide boards toward a successful transition.

CEOs Under Siege

Shareholder activism reached record-setting levels in 2024, with global campaign activity well above the long‑term average. Activism levels remained sustained across market capitalizations, signaling that no company is immune from a potential activist attack.

Activists have ratcheted up the pressure in the past two years, with public calls for CEOs to be replaced. Over 10% of activist campaigns initiated against US public companies in 2024 preceded the departure of the target company’s CEO. Activist-linked CEO departures increased almost threefold between 2023 and 2024.

The increased publicity and focus on a single target allow these campaigns to quickly diminish the perceived competency and fitness of a targeted CEO. Activists aim to hold CEOs accountable for failed strategic transactions or sustained underperformance, among other actions.

This type of induced resignations gives activists outsized influence over selecting a future CEO, with activists often seeking representation on a target company’s nominating and governance committee or an ad hoc CEO search committee.

CEO-targeted activism campaigns highlight the need for an established CEO succession plan and the risks of failing to have a plan in place. By preparing for potential activism and protecting the company against future CEO-targeted campaigns, in-house teams can meet this trend on their own terms and mitigate the risks associated with a forced change in leadership.

Key Considerations

GCs should view leadership changes holistically, reflecting on the potential wide‑ranging impact of a CEO change. The expansiveness of a GC’s role may vary depending on the circumstances of a leadership transition, such as involuntary termination or CEO retirement. While CEO transitions are fundamentally a board-driven process, GCs can help by:

Assisting with the process. In the early stages of a leadership change, a GC can establish a strong record by demonstrating how directors should fulfill their fiduciary duties, such as by seeking out appropriate information, thoroughly deliberating on the topic, avoiding potential conflicts of interest, and reaching out to experts as needed.

Being mindful of timing. In some cases, the GC can help with the transition process by ensuring statements from the CEO or directors do not trigger inadvertent disclosures. For example, a CEO’s notice to resign, retire, or of termination triggers a Form 8-K reporting obligation, regardless of whether the notice is in writing or whether the resignation, retirement, or termination is conditional or subject to acceptance.

The public announcement of a CEO change should be timed thoughtfully and account for planned earnings calls, investor days, industry conferences, and the company’s annual meeting.

Understanding the culture. In-house teams typically understand how a leadership change may affect the company’s corporate culture. Employees may have mixed emotions about a CEO change, and the board should understand how to communicate effectively with various constituencies.

In that way, the board may ask the GC to partner with an outside communications firm to help create tailored content to ensure materials align with the company’s values and culture.

Effective Practices

Management development is the cornerstone of effective CEO succession planning. The GC should ensure the board prioritizes management development and succession planning before a CEO’s departure as well as in unexpected transition scenarios.

Companies should have an executive leadership transition contingency plan, detailing steps and outlining a communications strategy. In many cases, companies use outside advisers to run tabletop exercises for the full board or the nominating and governance committee for specific situations such as a sudden incapacitation or death of the CEO.

The board, often with the help of outside legal counsel and/or the GC should take steps to help directors comply with their fiduciary duties, including:

• Incorporating appropriate disclosure in the company’s proxy statement of board efforts to address management development and succession planning.
• Assessing the need for outside advisers, including outside legal counsel specialized in governance and shareholder engagement matters.
• Addressing potential conflicts of interest.
• Considering whether a special committee of independent directors is needed, with appropriate powers and authority to address the matter.
• Defining a list of next steps.

GCs also should have a strong understanding of a company’s employment practices, including compensation consequences of a leadership transition, such as a golden parachute payment.

There is no one-size-fits-all approach when it comes to leadership transitions, but the GC and in‑house team play an important role in an effective CEO succession and remain a valuable contributor in mitigating potential risks.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Justin Nowell is partner at Sidley Austin and focused on corporate governance, shareholder activism, mergers and acquisitions, and private equity.

Arthur Adler is an associate at Sidley Austin and focused on M&A and corporate governance.

Joseph Camano is a law clerk with Sidley Austin.

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