What Are the Legal and Managerial Considerations of Succession Planning?

May 9, 2008

By Daniel A. Etna, Esq.
The University of Kentucky recently designated offensive coordinator Joker Phillips as its next head football coach, effective when Rich Brooks retires. At Texas Tech, when Bob Knight decided mid-season that enough was enough, the
handoff to his son Pat was relatively seamless because the school had publicly pronounced that the younger Knight was the eventual successor. In Happy Valley, however, the octogenarian Joe Paterno is working with neither a contract nor an heir apparent.
Why do some colleges and professional franchises designate head-coaches-in-waiting, and others do not? What are the upsides and downsides of both methods?
There are strong parallels between corporate America and collegiate and professional sports teams when it comes to succession planning. My law practice spans both worlds; I am primarily a corporate attorney, advising companies on all matters of business, including succession planning, but I also have a sub-specialty in advising professional sports franchises on their business matters. In these roles, I see the similarities and differences – and the commonalities are far greater – between succession planning in athletics and in commerce.
Most entry-level employees – graduate assistant coaches and mailroom workers alike – dream of someday sitting in the corner office. The head coach is analogous to the chief executive officer, and the assistant coaches are positioned similarly to corporate executives, most of whom covet the top job. There is no objective right or wrong way to plan for the replacement of the person at the top. The issues are too fact-sensitive to generalize and conclude that it’s better to announce a successor ahead of time or wait until the moment arrives.
Factors that argue in favor of anointing eventual head coaches and CEOs before the office-holder resigns or retires include:
• Retention of current talent and recruiting of future talent. The athletics-business analogy holds here, and it centers on continuity. College teams want their key players to know who the next head coach will be if the current head coach plans to leave – or is at an age where he might depart suddenly – before that actually happens. Recruits want to know whom they will play for, and uncertainty about the near future might cause them to look elsewhere. Professional athletes have the same options, to declare free agency or re-sign with their teams. And in the business world, retaining and attracting key employees at all levels is equally important. In both cases, the styles of the CEOs or head coaches is important to the talent. Quarterbacks with million-dollar arms generally prefer to play for coaches who like to throw, and running backs with million-dollar legs prefer those who lean toward a ground game.
• Among the most crucial retentions is that of the assistant coach – or executive vice president or chief operating officer – whom the team or company has identified as the best choice to lead in the future. Publicly designating the successor gives that person ample reason to stay and no reason to leave. It gives both the house and the talent comfort and the ability to plan their futures. With every upside comes a downside, and this is no exception. The assistant coaches and high-ranking executives who are not next in line will probably start looking to leave when the announcement is made. But the fact is that most will scatter once the change is made, regardless of whether it was announced ahead of time.
• Your customers – consumers of products and services in the business world, and ticket-buying fans in the athletic world – also want to know that there is a plan and continuity.
• In the world of collegiate sports, the boosters and alumni – who tend to donate money – also tend to prefer continuity (although, truth be told, they really crave being in on the decision itself.) And the university at large, which stands to gain revenue from appearances in bowl games and on television, has a stake in knowing.
There is no one-size-fits-all approach to succession planning, however. A school, pro franchise or widget manufacturer would probably be well advised not to designate a successor – publicly, at least – when the current job-holder is fairly young. Who among the assistants would want to be the designated successor behind a 45-year-old?
The parallels between the corporate world and the world of big-time athletics are strong but not infinite. There is more interaction between a head coach and his starters, for instance, than between a CEO and mid-level executives who ultimately report to him. Also, shareholders have more of an entitlement than fans to know who will lead a company once the CEO is finished. Fans can choose to continue buying season tickets or let their subscriptions lapse, but shareholders must decide whether to hold – or sell – their stock. Finally, the high-ranking business executives who are passed over as successor to the CEO may stay with the company regardless because they have equity positions or pension entitlements.
Another consideration when deciding whether to designate is the state of the franchise or the company. If a company is in the middle of a reorganization or restructuring, and the CEO is not likely to stay for the long haul or through a significant corporate event, it becomes more pressing for the company to designate the person who will carry the torch through the challenging times. Leaving aside momentarily the needs of the shareholders, creditors and lenders will be eager to know who is in line to lead the company. And if the team is losing games or the company is losing money, by announcing early you send a signal to all your constituents that there is a plan to improve, and that the status quo is unacceptable and will not be tolerated. Such a signal can energize talent, recruits, shareholders and other stakeholders.
In athletics and in business, there is also a middle ground to consider: designating privately without announcing publicly. That approach, too, has its own set of upsides and downsides and risks and rewards. Assistants and vice presidents who were not chosen as next-in-line will not be alienated and will stay aboard, and the designee has the comfort of knowing he has been selected. It is often difficult to keep information like that under wraps, however, and if the news leaks, the assistants surely would be alienated and the institution would lose credibility on a variety of issues with a number of constituents. In general, the risk-reward paradigm argues against the middle ground. By announcing publicly, an institution gets to measure fairly accurately who is disgruntled and should be removed from the landscape, and who can tolerate being passed over for the head job and is glad to continue as an underling.
As I opined earlier, there is no objective right or wrong way to plan for the replacement of your top person, or to disseminate that information. Fact patterns can drive the decisions. But all other things being equal, let’s consider a hypothetical high school junior who is on the A-list of every major college football program. Penn State – with all its tradition and success over the years, but an 81-year-old head coach with no contract and no successor named? Or Kentucky, where the virtual certainty is that either Rich Brooks or Joker Phillips will be in charge?
Daniel A. Etna, Esq., is a partner in the corporate department at New York City-based law firm Herrick, Feinstein LLP. His practice focuses on general corporate representation, corporate finance and mergers and acquisitions, with a sub-specialty in sports law. His clients include professional sports teams and a wide variety of private and public companies. He played college football at the University of Colorado and the University of Pennsylvania, from which he took his undergraduate degree.


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