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Chairman Succession Planning

Chairman succession planning is not widely discussed in most boardrooms because there are few formal mechanisms for addressing the issue beyond the chairman’s annual review with the senior independent director (SID). Good practice has never been codified, though it is touched on in the UK Corporate Governance Code and was discussed in the Higgs Review of 2003. There is, as always, a constructive gap between the code and the way boards handle chairman appointments in practice.

Chairman succession planning rarely appears at the nominations committee as long as the chairman is presiding over it. The subject is correctly reserved for the SID at annual board evaluation time or in a crisis. So it is unsurprising that there is no rule book of best practice for chairman succession planning. This may be just as well because it is as ambiguous as any art: good practice depends very much on companies’ individual situations.

This most critical of appointments comes up surprisingly often. At the time of writing, some 42 FTSE150 companies had appointed a new chairman over the previous two years, an historically high rate of change. Their average tenure is barely four and a half years — shorter by over six months than a decade ago. Chairmen change at about the same rate as chief executive officers (CEOs).

For many years we have we been advising boards on chairman succession. For such a critical appointment it is surprising how little has been written and how seldom the chairman succession planning process is openly discussed. A summary of best practice, based on our experience and that of a number of practising chairmen and SIDs, follows.

Planning

Needs more thought today because of a dearth of the highest quality candidates: role has changed; fewer complex multinational UK companies from which to draw future chairmen

The role has become more demanding of time and commitment than used to be the case. The chairman’s influence over the board and the whole organisation continues to grow, yet there is a dearth of truly first-class candidates.

The style of leadership has also changed. It used to be that chairmen either provided robust leadership from the front or existed merely as ceremonial figures. Now, chairmen are required to co-ordinate a board of strong non-executive directors and, when things go wrong, be ready to slip into directive mode. Greater versatility is required.

So there are fewer people with the time, business experience, personality and maturity to be exceptional chairmen. It is no longer easy for a retiring CEO immediately to become an effective chairman. To qualify for the role, it helps if a retiring executive already has some non-executive experience or has presided over a complex multi-divisional structure, preferably both. Unfortunately, there are fewer UK-quoted companies of that complexity today.

Only a minority of FTSE 150 CEOs have nonexecutive roles with other listed companies. For the rest, the day job is too demanding to allow them to spend time outside the company. Over the long term, there is certainly a need for aspiring chairmen among the executive community to develop their skills as non-executives and spend time observing other chairmen than their own.

Because the choice of candidates is limited, it is sensible to allow plenty of time to plan for the next chairman succession, a task that should fall to the current chairman working closely with the SID. This needs to include an early definition of the profile and criteria for selection, which may well have to be developed and revised as the company’s outlook changes.

Helps to have a common understanding of likely term, short of setting a date

To make planning easier, it is important for an incoming chairman to give the board a general sense of the parameters by which by which his or her term should be set. It is clearly not helpful to set a firm date for tenure because that is destabilising, but it is worth setting expectations. For example, it is useful to be clear whether or not a chairman expects to remain for two or three three-year terms, at least in principle, or whether he or she would expect to wait for the appointment of the next CEO before retiring.

Recruiting candidates in advance

It is sensible to recruit at least one nonexecutive, well ahead of time, who has the capacity to become the chairman in the future. However, no commitment about the chairmanship should be made to incoming non-executives, since the company’s circumstances and therefore the role specification of the next chairman are bound to change. Recruiting a non-executive on the basis that he or she will become the next chairman usually leads to disappointment. At the same time, it is good practice to have at least one non-executive with chairman qualities in the ranks — even if only as a backup in case of emergency.

Timetable defined by timing of CEO succession

The timing of the chairman’s succession should ideally be determined in the first instance by CEO succession. The aim is for the moves to be a year or two apart, for an orderly handover. Whether the chairman’s or the CEO’s departure comes first is entirely dependent on the company’s circumstances, business needs and the plans of the two individuals.

Appointment process

Likely to be initiated by the chairman, usually after his or her annual review with the SID. The chairman is the only person who should start the process and should not wait to be asked. The SID executes and only initiates if the chairman has already stayed too long or has lost the confidence of the board.

Ideally, the timing should be quietly understood well in advance. An effective board will discuss succession planning every year. Yet, several of the chairmen we spoke to admitted that many people stay too long in the role. As the person ultimately responsible for board composition, the chairman preferably should be seen to be initiating the succession process, although it should be executed by the SID, acting on behalf on the board. If the chairman does seem to be overdue for a move, it is up to the SID to make the point discreetly in a private conversation — and then deal with the appointment process.

One chairman stressed that it is most important that before handing over the succession process to the SID, the chairman should privately sound out each non-executive director, including the SID, to see if anybody wishes to be a candidate. If a board member has little chance of being appointed, now is the time for the outgoing chairman tactfully to set their expectations, thus avoiding potential embarrassment and hurt feelings.

The code states that an explanation should be given if neither a search firm nor — curiously — advertising was used in the appointment of a chairman.

The CEO should be kept closely enough involved for the nominations committee to know if the relationship with the new chairman is going to work.

The handling of the appointment process will set the tone for the relationship between the CEO and the new chairman. Getting the chemistry right is more art than science, which means that the headhunter must have a close understanding of the personal characteristics of the chairman candidates and the CEO.

Naturally, the CEO is central to the process, but conventionally should not control it. In very rare cases, the CEO takes the lead. If the CEO is seen as too dominant for the company’s business needs or for the board, the chairman succession process provides an opportunity to reset the balance. Effectively, the CEO wields a veto, but ideally should not be put into a position where he has to apply it.

Institutions to be informed but not consulted: test early if it looks like a controversial decision. Use the corporate broker.

It is obviously unwise to run an appointment process that disregards the view of the investors who own the company. However, this is the board’s decision and investors will expect to be informed just before an appointment is made, rather than consulted at length.

Investors will expect to see evidence that a systematic succession process is under way, but clearly not the details. It is obvious that the premature release of names will drive away potential candidates. If the nominations committee senses that the appointment might be controversial, it will then be useful to get the corporate broker to take confidential informal soundings about an individual from major investors, without necessarily revealing the company name or that an appointment is on the cards. It can of course sometimes be hard for a nominations committee to know whether a chairman candidate might be controversial. The search firm also has a role to play in taking soundings.

Taking office

Handover should be short and very clear about who is doing what

Power transfers surprisingly fast from the outgoing to the incoming chairman. It helps for there to be complete clarity about which of them is responsible for what — and when responsibility changes hands. One chairman likened the transition to the handover of control between two pilots of a plane. There is no room for ambiguity at this moment.

Start planning the next cycle: outline agreement on tenure is best done at the start

The best time to set expectations about tenure is at the moment of taking office. Leaving it later can lead to misunderstandings; it is up to the new chairman to initiate that discussion.

Conclusion

The chairmen to whom we spoke take a sensibly pragmatic view of succession planning, loosely based on the code. Each board, rightly, has its own approach.

However, a number of common points emerge. Chairman succession planning should be:

  • considered by the nominations committee well in advance on a continuous and confidential basis;
  • synchronised with CEO succession;
  • initiated by the chairman and then executed by the SID;
  • undertaken with a clear and rigorous process that paves the way for clean hand-over and an appropriate working relationship between the new chairman and the existing CEO.

Based on our experience, we would recommend that boards give a greater priority to advance planning, which is more of an advantage than it used to be due to the limited choice of exceptional candidates for this increasingly critical role and the importance of setting the right tone for the future working of an effective board.

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