September 10, 2020
How does the chair appointment process work?
As you approach your first chair role, it is helpful to understand the steps involved in the appointment process. How the nominations committee manages the chair appointment will be an eloquent demonstration of the governance standards of the board you seek to chair. It will be especially revealing of the balance of power between the executive team and the non-executive directors. This appointment process can set the terms of engagement for the future chair.
If the appointment process deviates markedly from the guidelines below, the candidate should seek at the least to understand why.
Succession planning is likely to be initiated – but crucially not led – by the chair, usually well before the end of the chair’s maximum nine-year term. In fact, the average tenure of chairs in the top 150 companies in the FTSE is just under five years according to the
2020 UK Spencer Stuart Board Index. Our view is that six years gives the chair a better chance to make a positive impact.
A natural occasion for the chair to initiate this kind of discussion is during the annual review with the senior independent director (SID). The chair should ideally say when the process should start and should not wait to be asked to consider retirement. He or she then stands aside as chair of the nominations committee, which now becomes the responsibility of the SID. The SID should only initiate the chair’s retirement if the chair has already stayed too long or has lost the confidence of the board.
Ideally, the timing of chair and CEO succession should be informally understood well in advance. An effective board will discuss succession planning every year. Timing is usually predicated on a combination of what the term limit demands, the expectations of the likely retirement of the CEO and the strategic outlook. Yet, it is all too often the case that chairs stay too long in the role. If it is time for the chair to move on, it is up to the SID to make the point discreetly in a private conversation – and then to manage the appointment process
It is most important that before handing over the chair search process to the SID, the chair should privately sound out the SID, to see if he or she wishes to be a candidate. The SID, if not a candidate, then picks up the baton and sounds out the other non-executive directors to see if any of them might be interested and to understand colleagues’ views on potential internal successors. Clearly, if the SID is a candidate, he or she must stand aside and another senior member of the board should take on the process.
If a board member has little chance of being appointed, now is the time for the SID tactfully to set their expectations, thus avoiding potential embarrassment and reputational damage. If you are an external candidate, it is clearly important to know if there are internal contenders. It is a legitimate question and no surprise that chair candidates ask it early in the process.
The SID will work with the nominations committee to draw up a role specification, select a search firm, manage the identification and appraisal of candidates and the appointment of the next chair. In nearly every case, a FTSE 100 chair succession will be assisted by a search firm, as recommended by the UK Corporate Governance Code. Usually, the company secretary and the HR director will also be involved, handling administration and regulatory matters, and offering wise advice and insight. They can be helpful sounding boards for the SID and, in better resourced companies, play an increasingly valuable role in chair succession.
The CEO should not control the appointment process, but should be kept closely enough involved for the nominations committee to know if the relationship with the prospective new chair is going to work well. The chair’s role is to guide, hire and fire the CEO, so the chemistry needs to work. Potential challenges to the new relationship need to be spotted early. Getting that right is more art than science, although culture fit assessment tools are increasingly being offered by search firms to help inform whether the new chair’s behavioural style and values will be compatible with the CEO, and indeed with the board as a whole.
The appointment of a new chair is ultimately the board’s decision. Big investors will expect to be informed only just before an appointment is made, rather than consulted at length early on. Investors will expect to see evidence of a systematic succession process, but clearly not the details. The premature release of names will drive away potential candidates. Any board worth your consideration will strive to keep the search confidential.
Well before you receive an offer, you will of course wish to carry your own due diligence on the business. It is recommended that you spend additional time with the CEO. Ideally, at least one of these meetings should be informal to allow you both to get a deeper understanding of each other’s personality and values. Your relationship with the CEO is critically important, and if you don’t see eye to eye, walk away.
Spend time with the CFO, with each non-executive director and with the outgoing chair. Consult the external auditors, the corporate brokers and financial advisers working with the company. Ask yourself if there is a cultural fit and whether you share the board’s values and ethics.
Understand the company as well as an outsider can: the operations, the business model, the people, the challenges and opportunities. Read analysts’ reports and media coverage in addition to the annual report and other background information on the company.
A good search consultant should be in a position to provide a balanced and well-informed view on the board and the business, bearing in mind your interests as well as the company’s interests.
In my next blog I will explore how the chair should work with the CEO.
This article is an extract from Becoming a non-executive chair, a guide for people who aspire to become chair of the board or are becoming a chair for the first time. It describes the steps to becoming a chair, what the role involves, and the personal characteristics needed to chair a board effectively.
If you would like to discuss any of the issues raised in this blog, please contact wdawkins@spencerstuart.com