In today’s rapidly changing business environment, directors must have the right skills that align with the organization’s long-term strategy. Many boards approach succession planning only when facing the need to replace a retiring director. Shareholders and stakeholders are paying more attention to planning for succession as institutional investors are putting pressure on boards to plan better for replacements. As well as planning, shareholders also desire increased disclosures to better understand board activities and hedge fund activists also have increased focus on board composition.
To be more strategic, boards can adopt the following options:
- Make board succession a priority on the agenda
- Take a multi-year view toward departures and upcoming leadership changes
- Set directors’ expectations around tenure
- Assess skills and attributes, and incorporate results from performance assessments
- Agree on a plan that prioritizes needs and build a talent pipeline
Board Succession Planning Maturity Continuum – An Example
A board member will reach the board’s mandatory retirement at age of 75 in approximately one year. This director has strong manufacturing background and is one of the three audit committee financial experts. He has deep expertise in financial management and investment banking.
The nominating committee plans to begin searching for the next director in the 3 - 4 months before the director is to leave. A skills matrix is not used to evaluate broader board needs. The committee will look to find similar candidates with similar skills of the previous director as long as the performance assessment survey does not reveal major changes for the overall board to implement in the future.
The nominating committee has discussions about the departure over the director throughout the year, and the committee uses and refreshes the board’s skills matrix. In the end, it concludes that the company’s digital strategy is becoming increasingly important and a director with digital skills will be critical to board composition. It also noted the need for greater gender diversity, and that several other board members qualify as audit committee financial experts. The committee then creates a profile for the potential candidate based on this information, and has solicited ideas for replacing their director.
The committee has been preparing for the director’s departure for more than a year, and is planning for more retirements down the road. The committee reviews the results of the assessments and considers whether the skill sets of the current directors are still relevant. It then regularly updates the skills matrix as part of the planning process and identifies digital skills in the manufacturing industry, gender diversity and operating experience as important to prioritize for board composition. The candidate profiles prioritized with skills and attributes help the committee search and interview candidates to replace the board members. The board’s skills matrix is disclosed in the proxy statement to provide greater transparency.
Making Board Succession Priority
On most boards, the nominating committee oversees the succession planning process. This includes developing and recommending criteria for board composition and addressing board refreshment and new candidate profiles. It is unlikely boards will handle succession planning in a serious way unless it is a major part of the agenda. The culture from the board must allow candid dialogue about refreshing the board and seeing what the board needs, whether those decisions are difficult or sensitive. Shareholders also now expect to have an understanding about the board’s succession planning process and understand if it exists, what needs to be addressed in the future, and how such topics are discussed. Proxy statements now include board succession planning and practices, but are very limited in scope.
Multi-year View on Upcoming Leadership Change
For strategic planning, you must anticipate retirement or change in board members before they happen. Boards feel pressure to waive or change policies such as mandatory retirement ages or recruit directors not aligned with their overall strategy without a plan in place. Boards with a succession plan take a longer-term view, focusing three to five years down the road. These types of boards will create waterfall charts, identifying all directors, their skills, specialization, roles, tenure, and the expected date of their departure or retirement. This expanded view gives the nominating committee time to plan and recruit the right person to fill the role. It is just as important to plan for unexpected turnover, most importantly people in leadership roles, which entities should have a plan to fill the role rapidly.
Setting Directors’ Expectations Around Tenure
Boards who are further along in succession planning should be openly discussing appropriate director turnover and board leadership should set the tone about the length of director’s service from the beginning. Existing board members must understand director re-nomination is not assumed and is based on the board’s evolution and performance of the individual director. It must also set clear expectations around the director’s tenure and should periodically assess whether the policies are appropriate or not. Another area boards can focus is the mix of broad tenures to seek a balance of composition on the board, between new and old. Lastly, the board should not rely solely on tenure-limiting policies to drive turnover, as the annual performance assessment can be effective to evaluate performance of an individual.
Nominating committees must compare skills and attributes of current directors and link them with those who are critical to their long-term strategy. As companies innovate, implement new technologies and enter into new markets, business models require directors with new skill sets. The committee uses board composition matrices to evaluate skills and attributes and include their multi-year succession plans. Feedback from the annual board, committee and individual director assessments needs to be incorporated into a board’s succession planning approach, and when done well, it can help identify what is needed in the future. Boards must understand institutional investor’s views about creating diversity in the boardroom, most specifically gender diversity. There is a growing recognition that boards with greater diversity foster better debate and decision making, and should ensure that diversity is a board priority.
Agreeing On a Plan to Prioritize the Talent Pipeline
Strategic board succession planning includes discussion around director departures, tenure evaluations, and performance results on a multi-year action plan. Nominating committees need to collectively debate and prioritize the board’s future composition and plan for a timeline of changes. Ultimately, the board succession plan should be reviewed and agreed on by the full board to help the board understand the full complement of directors and how each person contributed to the overall leadership the board provides. When identifying the board’s needs for future director candidates, it is important to be realistic in who is attainable and who is not. Boards further along the succession planning continuum should not only look for a candidate now, but proactively build relationships with potential candidates to develop a talent pipeline.
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