Strengthening Board Succession as One of the Most Important Processes for Board Directors

Board succession planning is often less discussed than chief executive officers and other high-ranking executives.?

Although they are quick to admit that they have it tough when it comes to selecting new directors, they normally just "cross that path when it's there" since the task seems too daunting. Organizations run the danger of being unprepared for board succession in today's cutthroat business climate.

KPMG observed a few years ago that not many boards have “formal succession plans in place”, while nearly one-third cite “lack of robust board and individual director evaluations” and “difficulty in removing underperforming directors” as among the greatest barriers to building and maintaining a high-performing board.” Up to this day, the situation regarding board succession planning is still quite grim.

So, how do we solve the dilemma of board succession?

Let’s find out together.

Overview of Timeframes for Board Succession

Boards used to wait until a director resigned before discussing succession planning. When boards don't take the time to prepare for board refreshments, they risk cutting corners in their search for new members. Boards may improve their chances of getting the right person for the job by preparing ahead and casting a broad net. Boards may increase their chances of assembling a high-quality board by proactive succession planning, even though there will always be some natural attrition that causes board change.

Well, a company's capacity to maintain dynamic and flexible leadership depends on its succession plan, which is more than just a list of items to check off. The composition, variety of skills, and preparedness of boards for future problems should be reviewed on a regular basis, and any changes in membership or size should be carefully evaluated in advance. By planning ahead, we may avoid last-minute panic and take our time to fill impending openings.

As a whole, the overarching purpose of each of these components of succession planning is to build a flexible system that can cater to the organization's leadership requirements in the future:

• Contingency Planning: Be Prepared for the Unexpected. Life is full of surprises, and the boardroom is no exception. It is essential to have a robust plan in place for sudden or unforeseen departures. This means not just having a list of potential candidates but understanding the specific roles and expertise that would be most difficult to replace on short notice. Preparing for these scenarios ensures that the organization can maintain its momentum, even in the face of unexpected changes.
• Medium-term Planning: Anticipate and Strategize. Look ahead to the foreseeable future, focusing on the anticipated replacement of current board directors and senior executives. All of it goes beyond identifying potential successors but also considering the evolving needs of the organization and how these roles might need to adapt. It's about aligning the board's composition with the organization's strategic direction.
• Long-term Planning: Visionary Thinking for Strategic Alignment. Long-term planning goes beyond individual appointments, looking at the bigger picture of how the board’s composition supports the delivery of the organization’s strategy, both now and into the future. In turn, this calls for foresight, thinking about what the board will need in the future to deal with new trends and problems. The board has to be ready to meet current challenges and, even better, be able to take advantage of future possibilities.

But Who Has the Responsibility for Board Succession?

In most board structures, a specific body—like the nominating or governance committee—is tasked with this responsibility. The responsibility of finding qualified applicants, interviewing them, and making the ultimate decision falls on this committee. In addition, they make sure that new directors are effectively integrated and continue to grow so that they can contribute to the board's goals.

Not all organizations have the?freedom to alter their bylaws to allow the board to choose members from the widest possible pool of applicants. Because it may be so difficult to locate the appropriate director at the right moment, these boards must prioritize their succession planning procedures. This is the case even though a big group of qualified individuals would want to serve on boards but aren't considered due to boards' narrow perspective on director succession.

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Critical Analysis of the Present Board Dynamics

Assess the present board of members, emphasizing their distinct abilities and varied skill sets. Identify any areas of expertise deficiency that impede the organization's strategic goals.

Objective Alignment of Board Requirements

Determine which qualities and competencies are essential for the board to accomplish the organization's strategic objectives. This constitutes a comprehensive board, as it comprises individuals with a wide array of professional competencies, industry backgrounds, and personal qualities.

Organizational Evolution Anticipation

As organizations progress in age, their needs may change modifications. This could necessitate a shift in perspective from that of a start-up to mandating directors possess greater expertise to lead a more mature and established organization.

Establishing the Board Composition

A clear picture of the perfect board composition is important for effective board succession planning - the?blend of expertise, experience, diversity, participation from executives, and gender diversity in particular. The ICGN Global Governance Principles, and the ASX Corporate Governance Principles are two examples of Best Practice Codes that provide guidance on these matters. These codes support the idea that most board members should be independent.

Shareholder Engagement and Representation

Companies with significant reference shareholders typically appoint directors to represent these stakeholders’ interests, with the system's integrity hinging on robust conflict management and transparent control disclosures. An inclusive nomination process engages key shareholders and other stakeholders, avoiding proxy fight hostilities and unnecessary expenses.

Conduct Performance Assessments

Board succession planning is consistent and thorough when it is based on a skills and diversity matrix and has a defined policy. The board's requirements may be better met, and detailed job descriptions for new directors can be drafted using this matrix. To keep the board functional, it is recommended that a board performance evaluation is conducted on a regular basis. The board maintains final authority over the process, but independent search experts may help identify suitable candidates.?

Always Preserve a High Degree of Transparency & Disclosure

For shareholders to constructively influence board succession planning, companies must provide timely and adequate information. While detailed nomination policies and matrices are seldom fully disclosed due to sensitivity, some leading companies offer insights into their governance practices through annual reports. Disclosures should focus on the principles, policies, and processes rather than on specific nomination details, fostering an environment of transparency and accountability.

Cultivate Dialogue with Stakeholders & Investors

Investor and company dialogue on board succession planning can be guided by targeted questions regarding the disclosure of board composition needs, succession and nomination policies, the achievement of composition goals, and the assessment of board effectiveness. These discussions should clarify the board's approach to diversity, executive participation, independence, and the identification of new competencies, ensuring alignment with current and future organizational needs.

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Bottom Line

Successful board succession?promotes a mix of short-, medium-, and long-term strategic planning, going beyond reactive tactics. Step by step, this method does double duty: it prepares the board for unexpected leadership vacancies and ensures that its changing makeup reflects the organization's strategic goals and future requirements. Maintaining diversity, knowledge, and a willingness to face future difficulties all need a proactive approach, which is crucial when negotiating the intricacies of board dynamics.

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Look at your board – does it have an effective succession plan yet? Are you confident that it would work? Quite simply, these are a few questions that might help you evaluate your current board succession plan.

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