Effective Board Succession Planning & Leadership Succession...

Boards are coming under increasing pressure to demonstrate their relevance at a time when multiple disruptive forces including destruction of Stakeholder value are threatening established governance models.  Increasingly, investors expect boards to have meaningful processes in place to renew new Director appointments.

By way of interest a growing number of “next-gen directors” are being appointed to boards. Many bring knowledge in fields such as cybersecurity, AI (artificial intelligence), machine learning and industry 4.0 technologies; others have firsthand experience of digital transformation, organizational design, customer insight or social communication.

According to US governance researchers, younger directors are having an impact on both the content and dynamic of boardroom debate. They are prompting fellow directors to engage with unfamiliar subject matter and bringing a different approach and perspective to the role.

Just as companies are broadening their thinking about the value of diversity and recognizing the benefits of cross-generational workforces, so boards are benefiting from recruiting directors who bring not only deeply needed expertise but also a contemporary view on how decisions will affect the whole spectrum of stakeholders — from employees and investors to customers and the community.

Emphasis is being increasingly directed towards effective board succession planning and Leadership succession.

Nearly all independent directors say that selecting the right leadership for the business is their most important role.

Time spent on succession is far too limited and the discussion not nearly candid enough. All too often, board members settle for a “hit by a bus” contingency plan. Such plans are crucial. Yet often the person ultimately identified to lead is just the most obvious interim leader, not the best long-term successor.

To better prepare for succession, boards should have multiple discussions each year to identify the company’s next generation of leaders. They need to create ways to get to know these candidates personally and observe them in crises and under pressure.

The board should also create a series of assignments to prepare prospective CEOs and other senior-executive candidates...

If succession isn’t taken seriously, directors may find that when the time comes, they do not have confidence in the internal candidates. Faced with this situation, directors may react—or overreact—by immediately initiating an external search, which bears substantial risks of its own.

Outside hires may look good on paper and have been successful elsewhere, but it is not uncommon to find they do not understand the company’s culture and values and do not take the time to identify the people who make the organization run successfully.

The board should instead conduct detailed leadership-succession-planning sessions to review candidates and their progression, ensuring that they have the necessary experiences to get them ready for the top jobs.

In these reviews, the age of the potential top leaders matters. They should not be so close in age to the CEO that they would be unable to have a sufficiently long tenure as CEO prior to reaching mandatory retirement, nor can they be so young that there simply isn’t time for them to have the experiences they need for such a major task. Thus, the process of identifying candidates for top roles must start early—typically, with leaders who are barely 30 years old.

Many best practice companies have crafted sophisticated processes for board succession which helps ensure continuity and performance sustainability.

It seems some companies are still characterised by a haphazard approach to board succession planning, ranging from a process wholly outsourced to consultants with limited control by the board to an opaque “friends and family” approach where the ultimate decision maker is management or a controlling shareholder.

Boards are responsible for directing the long-term success of companies, and their optimal composition over time is of key importance to investors. Therefore, establishing and maintaining entrepreneurial, independent company boards with the right competences and levels of diversity depends on robust board succession planning. 

This Viewpoint includes independence, refreshment, engagement, competence, integrity, transparency and inclusiveness.

Effective board succession planning starts with a clear idea about the optimal board composition: the required knowledge, skills and experience; the percentage of the board that should be composed of independent non-executive directors (INEDS), the level of executive participation and the level of diversity, especially gender diversity.

Board Refreshment - Another prerequisite for good board succession planning is a clear idea on board refreshment through the periodic appointment of new members and retirement of incumbent directors.

The goal is to appoint directors who provide diverse perspectives, while replacing directors who may no longer have the requisite skills aligned with the company’s evolving strategic direction.

The objective is unlocking board vacancies and allow for appropriate board diversity to improve board quality.

Successful boards are characterised as less prone to ‘group think’ and more likely to embrace new ways of thinking to meet future company threats and opportunities.

Re-electing Directors should be contingent on individual director performance and annual re-election premised on independent satisfactory evaluations of his or her contribution to the board.

The following questions will assist investor/shareholder enquiries on board succession planning: -

1. Does the business have a structured process of identifying its board composition needs?
2. Is there a board succession planning, assessment/gap identification policy in place?
3. Under this policy, how would the board expect to reach its composition goals?
4. Does the current board composition meet minimum quality criteria related to competence, integrity, independence, diversity and harmonization with strategic direction
5. Does the company clearly communicate its choices about diversity, executive participation and the level of independence?
6. How does the board identify new competency areas it might require in the next 5 years?
7. When were parameters used for the board effectiveness last independently review evaluated?

  Investor Confidence is the Bedrock of our Equity Markets…

 I’m Doug Marsh, a Wellington based (Rtd) Professional Chairman & Director, Inaugural President Business NZ and Hon.Consul.

I counsel clients on a full range of governance Best Practice Standards for the Board. My interest and expertise include Board Composition, “Gap” Assessment, Succession processes, assisting boards with director skills analysis and the dynamic excitement of Board Strategic Leadership,

Set up a conservation Now - My 2019-year schedule is filling fast…

Email me: marshgovernance@gmail.