5.1 Whole board succession
Boards are increasingly taking responsibility for their own succession needs. Many are intent on observing best practice for reviewing director performance and recruiting the next generation.
Succession starts with strategy. A company’s direction should inform the range of skills most needed around the boardroom table. An ideal mix of expertise will ensure that a board can fulfil its responsibility to advise, supervise and challenge management.
Board succession is most often the responsibility of the nomination (or nomination and governance) committee but the appointments themselves are made by the whole board, generally on the committee’s recommendation. The committee responsible should keep the full board informed about its deliberations rather than introduce a shortlist of preferred candidates once selected. The best processes ultimately involve all board members. That should certainly be the aim.
It is worth noting that in some jurisdictions the appointment of a director is not valid until approved by shareholders. In the UK the board appoints a new director with immediate effect, and this is ratified at the next shareholder meeting.
Directors should not assume that an ideal candidate will be easily found or, once found, readily available. There is competition for talent among potential non-executive directors just as there is for top executives. Boards should therefore consider casting a wide net and planning their recruitment well in advance.
The need for early planning of board succession is greater today in the light of public scrutiny, pressure from rating agencies, governance watchdogs, regulators and the demand for additional skill sets to support changes in company strategies. All boards, from major corporations to not-for-profit organisations, are increasingly in the spotlight and need to demonstrate their willingness to evolve.
Consequently, succession planning should not be an episodic event or exercise; it should be seen as a continuing process.
This applies equally to the critical positions of chairman and CEO. Here, the process of succession in the longer term should begin upon appointment. Indeed, thinking about this issue should be all-encompassing, embrace all board positions and should be a standing agenda item for the nomination committee.
Gradual reinvigoration should be the aim, with retirements and appointments ordered to satisfy the need for both continuity and fresh thinking. Each board seat should be occupied by a skilled director who knows his or her role, has received a thorough induction and continues to be offered appropriate development opportunities.
All this is best achieved if the board is consistently advised by an external consultant, creating a partnership with the business that has the single ambition of smooth succession, whenever it is required.
Well-informed board succession planning ensures a strong, relevant board. A transparent process helps to create a respectful boardroom culture. High-performing boards use a variety of tools to facilitate succession planning, and we shall now look at some of them.
5.2 Guiding principles for board succession
Effective board succession depends on the following:
- A continuing process of reviewing and identifying needs
- An early start on each specific recruitment
- Definition of the skills, experience and diversity necessary to support the strategy and populate committees
- Inventory of the skills, contributions and diversity of current board members to identify any gaps
- Annual board review process including feedback for individual directors
- The board’s policy on tenure and exiting members: performance review, term limits or mandatory retirement
- Committees structured to include the requisite skills and experience.
Used consistently, these tools should produce a clear picture of the gap between the board today and what it needs to be in the future. The nomination committee should formulate a plan for how to bridge that gap.
The makeup of the board and the planning of changes should be sequenced to avoid clusters of departures. Given the increasingly common practice of mandating maximum terms, wholesale change can occur at a bad time for the business. Staggered appointments are therefore important; without them the board may undergo an unplanned culture shift.
Boards that are most effective at succession planning ask the chairman or senior independent director to have candid conversations with directors at the outset about how long they plan to serve. This shared understanding between the board and each director is often the missing piece in the jigsaw of board succession planning.
It is difficult to ask long-serving directors to make room for directors with new or different skills. But careful long-term succession planning, overseen by the chairman and the relevant committee, helps to make these transitions smooth and dignified.
5.3 Factors to consider in board succession
In recent years, several factors have increased the complexity of board succession planning:
- The need for remuneration committees to be experienced in developing complex remuneration plans and to conduct their work with sensitivity to outside opinion
- An increasing demand for specific competencies and risk management experience among audit committee members
- The need for directors to chair these committees
- The need for directors who understand digital and social media tools
- The need for diversity (cognitive, gender, age, ethnicity, etc.)
- A global vision
- Foreign market expertise
- The need to satisfy regulators
- Rising attention to term limits
- The increased risk of legal liability
- Greater scrutiny from investors and the media.
These requirements, some practical and some professional, mean that a comprehensive search process has to start early, as we have already noted. It should also be both wider and deeper, to ensure that the best candidates are identified and reviewed. Calling upon external professional advice is now standard practice to satisfy stakeholders that this is the case.
5.4 Chairman succession
This subject requires careful thought and, again, long-term planning. The chairman should not manage his or her own succession process. Rather, chairman succession should be handled by the senior independent director, deputy chairman or equivalent. Difficulties can arise where the chairman is also the CEO and where board members may not feel confident, either individually or collectively, in raising such a sensitive topic.
Since the candidate pool for chairmen is perceived as small and demand is high, it is imperative that the board has a plan for chairman succession and starts the process early.
Our observation is that boards almost always leave it too late — defying the basic principle of succession planning that it should be planned. It therefore helps for everyone to have a common understanding of the likely term for the chairman.
Each board should make a point of discussing chairman succession openly and without any implied criticism. There should be a clear line of sight at least 12 to 18 months ahead.
The best succession process begins on appointment, as we have emphasised above. The best chairmen are aware of this too. Succession of the chairman should ideally be coordinated to avoid clashing with the end of the CEO’s tenure. It is important to avoid both being replaced at the same time, especially as one of the chairman’s principal duties is to manage the CEO’s position.
It is not uncommon for a candidate for the chairmanship to emerge from among the existing outside directors. The process should be flexible enough to accommodate this and for appropriate arrangements to be put in place to avoid conflict and ensure a level playing field.
Sometimes a chairman candidate is recruited to the board with a view to becoming the chairman within 12 months — a strategy that can ensure an orderly and timely process.
It is sensible to recruit at least one non-executive, well ahead of time, who has the capacity to become the chairman in the future.
Such a plan should complement the succession plan for the CEO — the two plans should be sequential not simultaneous.
The chairman succession process
The process for chairman succession is typically led by the deputy chairman or senior independent director (SID). There can be good reasons why the SID does not lead the process, for example if he or she wishes to be considered as a candidate. In this case, the process is led by another senior board member.
The director leading the succession process may form a chairman succession committee (CSC) to run the process. In some cases, the composition of the CSC is identical to that of the nomination committee and in others it is different but typically it includes members from the nomination committee.
The committee members should not include directors who wish to be considered as a candidate for the role of chairman. The current chairman should not be a member of the CSC.
The CSC should appoint a search firm to advise on the chairman succession process. As a first step, the CSC and the search firm should agree a timetable with clear milestones and deliverables.
The CSC, with the support of the search firm, should then draw up a specification for the role of chairman. The specification should outline the ideal business experience and track record given the company’s likely agenda over the next few years; it should also set the priorities for criteria such as nationality and domicile and detail the expected time commitment and key responsibilities for the role. Ideally, all board members should be consulted for their views on what the specification might include.
Once the CSC has approved the specification, the search firm begins the research to identify qualified candidates. All directors should be invited to submit any candidate suggestions they may have and these should be included for the CSC to consider, alongside those candidates identified by the search firm.
Shortlisted candidates should be interviewed by the chairman of the CSC and at least two, but ideally all, members of the CSC. When the committee has decided upon its preferred candidate (or final two candidates), he or she should meet the CEO. At the end of the process, the finalist candidate should meet the current chairman and those board members who are not CSC members; this is often done in a more social setting, for example at a board dinner.
5.5 CEO succession
CEO succession is in many ways the most important issue for the board. As with board and chairman succession planning, it is a continuous process, best served by taking external advice.
The best time to start the process is early in the CEO’s tenure. Leaving it later can lead to misunderstandings — it is up to the chairman to initiate that discussion.
The company approach has to be clear and agreed before embarking on a succession planning process. Effective, long-term succession planning should encompass these six elements:
- The right, air-tight process
- Well-defined requirements for the future leader
- Thoughtful assessment of internal candidates and tailored development plans
- Accurate comparisons to external talent benchmarks
- Powerful decision support at crucial times
- Successful transition plans and support.
CEO succession — avoiding pitfalls
CEO succession represents a critical turning point for companies when tremendous value can be created or destroyed. Furthermore, succession planning is complicated, requiring the board to manage through the complexity and risk of the decision and the different ways in which events may unfold over time. Succession planning also can be a highly personal and charged topic, particularly for the CEO. Part of the board’s role is to defuse these issues and minimise the emotion of the process.
A properly handled long-term process will increase the likelihood that the company will produce a strong internal candidate, while ensuring that disappointed internal candidates are treated with courtesy and tact.
We have identified three critical steps to avoid pitfalls.
Start early and review the plan regularly
In the best processes, objective, third-party assessments of internal talent occur early enough to provide candidates time to develop and the board time to build a fuller, more nuanced view of internal players. The board should review the plan and candidates’ progress at least once annually.
Build and maintain trust in the process
Once they have been through it, directors often remark on the power of the succession process to align the board around the strategic direction of the business, the capabilities needed in the next CEO and in the ultimate CEO successor. This only happens when the board oversees an effective, transparent process, ensures that the stakeholders understand the process and maintains an open line of communication with internal candidates.
Remain vigilant even after a decision is made
The board should stay involved in the CEO transition to ensure the incoming CEO establishes a clear plan for the early days of the transition and that it is executed in a disciplined manner. The board also should make sure that the outgoing CEO provides the necessary support to the new CEO without seeming to interfere.
The board has to be certain that there is a pipeline of high-quality executives rising through the ranks and capable of joining the senior executive team. The board, and especially either its chairman or that of the nomination committee, should be capable of forming an assessment of the next generation of top executives.
Any selection process will inevitably involve a series of early choices. For example, the board may prefer a proven CEO with a strong profile among investors. Specific industry expertise might be more highly valued than a good track record in more than one industry. Boards should always be prepared to revisit these preferences as the merits of individual candidates become clear.
Responsibilities should be clearly established by defining the different roles of the chairman, the full board and its committees. It is vital for board members to maintain confidentiality when CEO succession is discussed, particularly when internal candidates are being considered.
The early identification of an “anointed successor” should be avoided. The risk is that this takes away the board’s ability to respond to subsequent events, leaving it with too few options.
If the CEO departs unexpectedly, the board has to be prepared to ensure management continuity. The board and the CEO should together establish a strategy in advance and define the procedures that will take effect if an emergency occurs. The chairman of the board or of the committee responsible should know the potential candidates who are willing to take on management responsibility in an emergency or which board member may be able to step in.
Assembling a list of candidates and selecting the right one is and always should be a bespoke exercise. Context is everything. It is not the case that outsiders are per se preferable to insiders or vice versa – it will always depend upon the candidates’ abilities and the company’s needs at the time. It is the board’s job to look beyond an individual candidate’s track record to see that their true potential addresses the corporate opportunity.
5.6 Succession of combined chairman/CEO
In countries where separating the roles is standard, the appointment of a combined chairman/CEO is usually a response to specific circumstances and seen as transitional. Examples might include a company founder or a long-tenured and particularly successful CEO. In these cases, a chairman/CEO successor will generally be found from within and not necessarily involve a third-party search.
In jurisdictions where the combined chairman/CEO leadership structure is the norm, the process should be similar to the search for a chairman described above, i.e. led by a senior board member, not involving the current chairman/CEO, and carried out under the guidance of an external advisor.
In such a combination, the principal need is for a compelling candidate for the CEO role who is able to perform the role of chairman, and not vice versa.
5.7 Succession below CEO level
The board must view senior executive succession as a medium- to long-term process, avoiding ad hoc appointments that bring with them the risk of failure. The board should take the opportunity to oversee the succession of senior-level executives in the internal pipeline. The following measures need to be in place and kept under permanent review:
- Exposure to the senior team and the level immediately below is essential. This can be both formal and informal — through the medium of boardroom presentations and attendance, or through business and social events, preferably both
- Regular opportunities for getting to know key managers with potential, including their participation in the annual strategy meeting
- Regular reports from the executive team on high-potential employees and the provision of development support
- Agreement between the board and the management team on the criteria for appraising the next generation of management
- Either a committee or the full board to monitor the systems for developing and promoting future senior managers.
Current best practice is as follows:
- A professionally assisted review of the candidate pool for senior positions. This in turn involves an analysis of the candidates’ strengths, weaknesses and potential, enabling boards to come to decisions on long-term succession planning — in the interests of both the company and the executive themselves
- Professional, confidential benchmarking of possible internal candidates against external executives, especially in relation to CEO succession, should form part of this scrutiny
- Top-tier effectiveness requires a careful review of the structure and membership of the executive team or management board. The ability to work collectively and through others is vital and can only be properly evaluated by a third party using robust assessment tools.
Regardless of whether the board is unitary or supervisory, the principal
issue is that the senior executive pipeline should be under constant and dynamic review.
5.8 Executive assessment
In all executive appointments, in particular the CEO, it is best practice to conduct a rigorous assessment of the individual character and capability of finalist candidates.
This assessment should cover, as a minimum, a comprehensive review of achievements to date, rigorous evaluation of the candidates’ potential in the specific role, their character, capabilities, leadership style and cultural fit with the organisation.
An integrated, multi-method approach must be carried out by an experienced assessment expert, properly resourced and backed by appropriate intellectual property and benchmarking data.
The objective should be to predict the future leader’s likely success in the context of the particular organisation and its market and reduce the risks inherent in promoting an insider or importing a talented outsider.