You Want CEO Succession Planning? Go for It.

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When Verizon Communications (NYS: VZ) named Lowell McAdam as its president and CEO last week, it was a move investors had seen coming for more than 10 months. Last September, the telecommunications giant had clearly outlined its CEO succession plans when it promoted McAdam to chief operating officer and president.

Verizon shareholders were fortunate to have their management outline a clear succession plan, but many investors aren't as lucky. They're left wondering who will eventually lead their company should the CEO exit. Like death and taxes, CEO departures are inevitable, whether through ouster, retirement, or mortality.

That prospect, and rightly so, should make investors nervous. Just ask the shareholders of Apple (NAS: AAPL) and Oracle (NAS: ORCL) . The vision for these companies is tightly integrated with the founders. And although corporate boards often say succession planning is always top of mind, investors tend to receive an opaque view of whether any planning is actually in the works.

Sound the alarm
When should mom-and-pop investors push a board into action

First, ask if the CEO's departure would have a material effect on the company, or if the management bench is deep and wide.

Some companies can swap out CEOs while making the stock virtually yawn. For instance, SAP has a two-in-the-box strategy with co-CEOs Bill McDermott and Jim Hagemann Snabe sharing in duties from strategy to communications and marketing.

Berkshire Hathaway CEO Warren Buffett, Apple's Steve Jobs, and Oracle's Larry Ellison are considered the brain trusts behind their respective companies, and investors should rightly call for an outline of a game plan -- even if it doesn't mean having the company explicitly name prospective CEO candidates.

Second, companies with a CEO who enjoys high-adventure sports or hobbies should pencil in a succession plan before the CEO boards his next fighter plane, as in the case of Ellison, or suits up for the next NASCAR race, like Century 21 Real Estate CEO Rick Davidson.

Apple has left its investors jittery each time Jobs has taken a medical leave. The lack of clarity over his health and the company's plan for succession has riled investors to the point that a shareholder's CEO succession proposal was placed on the company's most recent proxy ballot. The proposal, which asked Apple's directors to develop CEO criteria and begin the succession planning process at least three years before needed, called for the directors to review the plan annually.

Apple investors rejected the CEO succession proposal, with only 30.1% of investors favoring such a policy, according to Patrick McGurn, who tracks corporate governance issues for proxy advisor Institutional Shareholder Services (ISS).

Launching a shareholder proposal
It doesn't take much for an individual investor to raise his or her voice in a proxy over CEO succession. In order to put forward a shareholder proposal, the investor needs to hold $2,000 worth of the stock for one year and promise to hold the stake through the next shareholders meeting, McGurn says. The other step is to make sure the proposal is filed with the company before the deadline.

Individual investors often don't have the deep pockets needed to wage a proxy campaign or marketing blitz to woo investors to their way of thinking.

However, one mom-and-pop shareholder activist, John Chevedden, offers some advice. For starters, folks would be wise to monitor growing support for a particular issue that can be tried at an investor's target company, like CEO succession, simple majority voting, or abolishing poison pills.

Investors wanting to launch a CEO succession shareholder proposal can take a look at similar proposals filed by institutional investors and use the "resolve" sections as a template for their proposal, say shareholder activists and McGurn.

CEO succession not necessarily sexy
Last year marked the first year that investors could put CEO succession proposals on the ballot. Prior to the 2010 proxy season, the SEC viewed CEO succession as affecting the daily management of a company, rather than a risk item.

Five shareholder proposals calling for CEO succession planning were voted on last year, for Whole Foods Market (NAS: WFM) , Bank of America (NYS: BAC) , Verizon, Comcast, and FedEx (NYS: FDX) . 

All five shareholder proposals failed, with support ranging from 14.5% to 40.1% in favor of such a game plan, according to ISS. This year, only two CEO succession proposals have been voted on so far by shareholders, one involving Apple and the other Kohl's (NYS: KSS) . Both proposals have also failed.

"We thought we'd have momentum on CEO succession, but it didn't materialize," McGurn said, noting that the average of 30% in favor is a respectable showing."Most of the institutional investors are driving these proposals and it hasn't yet captured the imagination of the individual investor, who usually makes up the lion's share of all shareholder proposals."

Use the comments box below to let me know what you think about this issue.

At the time this article was published Fool contributorDawn Kawamotodoes not hold any shares in the companies listed. The Motley Fool owns shares of Berkshire Hathaway, Apple, Oracle, FedEx, and Whole Foods. The Fool owns shares of and has opened a short position on Bank of America.Motley Fool newsletter serviceshave recommended buying shares of Whole Foods, Berkshire Hathaway, FedEx, and Apple, as well as creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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