14 Dec 2020
Board Succession Planning
Subscribe to our newsletter. Enter your details below.
Replacing board members can be a complicated process. In addition to considering the competencies of the outgoing director and their potential replacements, nominating committees have to consider things like expertise, skills, diversity profiles and career backgrounds of current directors, as well as the forward-looking requirements of the company’s strategy and the complex mix of variables that contribute to board culture.
Getting all this right takes time, effort and foresight. Unfortunately, however, far too many boards leave succession planning questions unanswered until the problems of succession are upon them.
In this paper, which was originally published in three installments by the Atlanta Business Chronicle, Odgers Berndtson Partner Mats-Ola explores why it’s important to be proactive about building a board succession plan, how to go about the complicated task of building a plan, and what qualities make a good director.
PART I: WHY BE PROACTIVE ABOUT BOARD SUCCESSION
Boards with subpar succession plans are reactive rather than proactive. They seriously consider succession only when a director’s departure is imminent. By the time the nominating and governance committee begins developing candidate profiles, they may have only months or weeks to identify new candidates. This problem is multiplied when boards fail to systematically conduct director performance assessments or to cross-reference them against the strategic and operational challenges facing the company.
As a result, when finding a new director, the nominating and governance committee often lacks a predefined understanding of what strategic function or challenges the new director should be able to help address. Pressed for time and lacking adequate information, a nominating and governance committee generally takes the easy way out and looks for a director candidate who most resembles the outgoing director. In doing so, they miss an opportunity to increase board diversity, fill current skill gaps or realign board competencies with the company’s constantly updating strategic and operational goals.
Boards that excel at succession planning are proactive. Valuing self-awareness and self-improvement, they constantly analyze the contributions and expertise of their directors with an eye toward improving them. To this end, they conduct board-wide skills assessments and incorporate the results into both educational and recruiting initiatives. They consult with third-party experts about how to further align their board’s competencies with future business risks. They know when a director is underperforming, and they have systems in place to help improve their performance including coaching services. They have established expectations about board tenure, know roughly when each director plans or is required by the bylaws to retire and can begin identifying specific replacements years in advance of these dates.
In short, succession planning, for proactive boards, is part of their quarterly agenda. The nominating and governance committee is constantly building and updating a pipeline of interested and qualified director candidates.
A proactive board sees turnover — both planned and unplanned — as a vehicle of progress, an opportunity to improve the composition and the functioning of the board.
Four reasons to create a comprehensive board succession plan
1. It establishes a continuous process by which board composition is evaluated and director effectiveness improved.
Proactive boards take board competency assessments seriously. They use skills matrices to identify the expertise, contribution and diversity profiles of their board members, and then cross-reference the results against the company’s current and anticipated strategy.
While unprepared boards assess their board members’ performance and board composition only informally, prepared boards formalize this process and use the results to inform continuing education and coaching initiatives, committee structures and short and long-term recruitment goals.
2. It ensures that incoming directors are aligned with strategy and minimizes the disruptive risks associated with sudden departures.
An assessment-driven succession plan turns the process of board turnover into a tool for board improvement. It creates a process in which the board continually adjusts its expertise to realign itself with its current and future strategy. In periods of breakneck speed and technological change, companies that make board succession planning a formal and routine quarterly process stand to win big over companies that do not.
Unplanned turnover at the director level can cause turmoil, which is why institutional shareholders tend to place more confidence in companies whose board succession procedures take unplanned retirement into account. Investors rest easier with the knowledge that the nominating and governance committee is aware of the board’s competency needs, has a preidentified and routinely updated pipeline of director candidates for each position on the board, and can convert a potentially turbulent unplanned turnover into an opportunity to further align the board with its current and anticipated strategic needs.
3. It ensures that the diversity profile of incoming directors is aligned with the board’s strategic goals.
The research is clear: Companies with diverse boards have more insightful conversations and outperform their competitors (registration required). And where the data goes, investors follow. Many of the world’s largest institutional shareholders actively demand gender diversity on the boards of the companies they invest in. Diversity encompasses gender, race, nationality, age and expertise, all of which can contribute to a dynamic and effective boardroom — yet the nuances are often only superficially considered by reactive boards. Proactive boards, on the other hand, armed with both time and self-awareness, are able to carefully weigh diversity in the board refreshment process — and as a result, they reap the benefits.
4. It minimizes the risks associated with underperforming directors.
In their 2012 Annual Corporate Director Survey, PricewaterhouseCoopers reported that nearly a third of directors thought that at least one of their peers was underperforming and should be replaced. By 2018, that number had risen to 45% (registration required). Clearly, many directors feel that board composition and performance could be improved.
This sentiment is shared by investors, many of whom have grown wary of companies with underperforming or strategically misaligned board members. A long-term succession plan should formalize the system by which underperformance is measured.
Consistent performance reviews can improve an underperforming board member’s contribution by offering coaching in specific areas they need to improve. In cases where board members fail to self-correct, the assessments also arm the board’s leadership with the data and vocabulary they need to justify the process of replacing that board member.
PART II: HOW TO BUILD A BOARD SUCCESSION PLAN
Even when boards acknowledge that it’s a good idea to formalize a strategic succession process, the act of actually doing so can be daunting. Here are five steps you’ll need to take to in order to build an institutionalized board succession plan:
Step one: get everyone on board
Board succession plans, if they are to be successful, necessarily involve assessing the board’s competencies. That means directors who propose these plans sometimes face pushback from their peers. These recalcitrant directors often argue — and not always incorrectly — that the board is already functioning well, and that an evaluation system — which proceeds from the basic assumption that the board can do better — is an offensive distraction from more pressing oversight responsibilities. Convincing these directors to get behind a strategic board succession process can be difficult. The best way to do it? Give them a sense of ownership over the process right from the start. Once recalcitrant directors see that they’ve had a hand in defining the competencies against which they and their fellow board members will be evaluated, they tend to feel less threatened by the notion.
Discussions about refreshing the board can be emotional. It’s important to make the process collaborative and include input from various stakeholders. Specialized board consultants can also provide invaluable support by analyzing the board from the outside in. These consultants are often able to give unbiased diagnoses of the board’s functionality, competency and strategic alignment and reveal blind spots while adding new perspectives.
Step two: institutionalize the plan and the process
Unlike, say, flood insurance, succession plans aren’t documents that, once created, are put in a drawer with the hope that you’ll never see them again. A succession plan is a process — a series of tasks and discussions that must be repeated and updated, meeting after meeting, year after year. To maintain the necessary momentum, boards must do the following:
- Make someone (generally the chair of the nominating and governance committee) responsible for overseeing the creation, maintenance and ongoing development of the plan.
- Make the plan part of the agenda, something the board returns to at each quarterly meeting.
- Make it clear to all directors that thinking about board refreshment is a fundamental part of their job.
Step three: gap analysis
Gap analysis is when a company identifies the director competencies best aligned with their strategic goals, then measures the gap between these desired competencies and those that currently exist on the board. This is the foundation of a good succession planning process.
To implement a gap analysis, boards first have to identify the company’s short- and long-term strategies and then identify the competencies that the board will need to adequately support those strategies going forward. Once these desired competencies are understood, the board must then conduct director and board assessments. These assessments help the board map the qualifications of its directors, define and identify gaps in director performance, and determine which skills and diversity profiles could improve the board and help it avoid stagnation and conformism.
At this point, armed with a data-driven portrait of itself and a data-driven portrait of what it wants to be, the board can begin building skills, tenure and experience matrices. These matrices allow the board to do two things:
- Evaluate directors based on a number of metrics, including skill set, behavioral style and committee involvement.
- Analyze the gaps between the knowledge and capabilities that the board currently has, the skills and profiles it currently needs, and the qualities it will need going forward.
Step four: Act on the gaps
Even for the highest-performing boards, the assessment process will reveal gaps between self-assessed competencies and peer-assessed competencies, and gaps between the board’s current capabilities and those it needs to drive future strategy. Some of these gaps may have to be bridged by director refreshment, but many can be solved by development initiatives. A finance committee chair may never be an expert in digital marketing, but can learn enough to ask experts the right questions and then effectively contribute to conversations about related strategies.
Note that the implementation of the results of an assessment is perhaps the most common point of failure of those boards trying to improve their effectiveness. Assessments are only effective if the board is willing to use them as the basis for actions leading to real change.
Step five: build a pipeline
Armed with a skills matrix, competency assessments and clearly defined profiles for future board appointments, boards can begin developing a pipeline of interested and qualified candidates, some of whom are good fits for the near future, and others for three to five years down the line. When regularly updated, this talent pipeline can prepare the committee to deal with both short- and long-term succession contingencies. To guard against unplanned board vacancies, companies should identify a number of candidates who could feasibly join the board right now. At the same time, however, nominating committees should play the long game, developing and updating an extensive list of high-potential candidates who could play important roles on the board in the coming years.
PART III: RECRUIT THE RIGHT BOARD MEMBERS
Corporate boards are living bodies; when longstanding directors finish their service, their chairs are filled by new directors who bring fresh ideas, perspectives and energy into the boardroom. Managed successfully, in the structured context of a succession plan, a board’s turnover can be one of its greatest assets. It can enable it to continually adjust its composition in ways that optimize its oversight, crisis management and strategic planning mandates — while minimizing the risks that come from unexpected departures. These risks can be especially detrimental to companies in times of market stress.
Managed successfully, in the structured context of a succession plan, a board’s turnover can be one of its greatest assets, enabling it to continually adjust its composition in ways that optimize its oversight and strategic planning mandates.
There are a lot of factors to weigh when recruiting new non-executive directors. Here are five to consider:
All non-executive directors, regardless of their specific expertise or their level of experience, must:
- Be able to make significant contributions to discussions about strategy, operations and oversight.
- Bring new perspectives into the boardroom stemming from their expertise, experience and diversity of gender, age and ethnicity.
- Be curious, invested and willing to constantly deepen and revise their knowledge of the company, its sector, its technical environment and an array of continually evolving risk and environmental, social, and governance factors.
- Be skeptical, capable of thinking outside the keywords, able to challenge their own assumptions and brave enough to constructively challenge the assumptions of their peers.
- Offer counsel and coaching and exert influence not by mandate but by asking questions and offering advice.
- Be team-oriented and offer respect to fellow board members and differing points of view.
- Be highly moral, with a reputation of professionalism, integrity and the highest ethical standards.
It’s widely understood that each director should bring a particular strategic perspective to the boardroom, but many boards put too much weight on certain kinds of expertise. This mistake is reflective of a common misunderstanding about how boards add value to the companies they oversee.
Recent research suggests that many boards, particularly the lower-functioning ones, place too much value on financial, compliance, audit and other oversight-related aspects of the board’s role. Average-performing boards spend approximately 28% of their time engaging in financial review, 13% in compliance and 11% in audit. High-performing boards spend far less of their energies on these tasks (11%, 6% and 3%, respectively) and instead devote their time to forward-looking strategic and operational objectives.
The implication here: Though oversight is a real part of board work, boards should spend more time mapping strategy and coaching the executive team than reviewing the nitty-gritty details of the executive team’s work. The skill sets and competencies deemed requisite for board membership should reflect this.
No single mindset or personality type is best correlated with director success. People are different, and the corporate board is a varied institution for this reason. Differences in age, skill set, mindset and experience allow boards to chart wise paths for their companies. That said, most good directors do share certain behavioral traits.
- They are good collaborators: Because boards are diverse, featuring people with different skill sets, backgrounds and ways of thinking, there will be times when directors’ views conflict. High-performing directors excel in this context: They are willing to explain their views to audiences and carefully consider things that they are instinctively skeptical of. This is important because boards are self-correcting bodies, with each member meant to counteract blind spots of their fellow directors and the executive team.
- They are socially savvy: Directors need to be good at gauging personalities and delivering information to different kinds of people. Some people best respond to Socratic guidance, in which case directors need to be able to steer policy by asking questions rather than making overt recommendations. Others respond better to more concrete guidance. Good board members structure their advice around the emotional and intellectual needs of the people to whom it is addressed.
- They are hardworking and skeptical: Effective board members are generally uncomfortable following initial instincts. They want to base decisions on data and therefore work hard to develop a fluent grasp of all the options before they commit to any one decision.
- They can see the big picture without getting lost in it: Corporate directors have both the privilege and the burden of thinking on a time scale that exceeds the management horizon. They have to actively measure the company’s long-term strategy against present realities and translate conceptual ideas into actionable strategies.
Previous board experience versus freshmen directors
Appointing directors with previous board experience could produce strong short-term results. While those results are not a hallmark of long-term performance, experienced directors know how boards function, what the general expectations are and how to orient their lives around a typical non-executive director schedule. First-time directors, on the other hand, tend to have to learn these things as they go. For this reason, nominating committees should look for people with previous board experience when rushing to fill unexpected vacancies or when the company is undergoing some kind of immediate crisis.
Barring these contingencies, however, previous board experience is a less important consideration than most other factors — including skill set, mindset, age and diversity — because their lack of prior board experience is only a temporary impediment. Many first-time directors grasp the role within a few quarters. Gaps in their knowledge can be partially mitigated by appointing each new director with a formal mentor or sending them to third-party director education programs.
Most first-time directors underestimate the time commitment of a director. In high-performing companies, non-executive directors spend an average of 200 hours and 20 to 30 days per year on board work — excluding travel. And this is just the baseline. When crises or urgent opportunities come along, directors’ time commitments often skyrocket.
For this reason, each candidate must be evaluated based on their ability to devote adequate time to their duties. Because new directors will serve for six to nine years, this evaluation should anticipate career developments.
PART IV: CONCLUSION
Succession plans minimize the risks from unexpected turnover while maximizing the opportunities associated with fresh talent; they help formalize the company’s commitments to its diversity goals; they help define and measure individual director performance, which can lead to fruitful development initiatives; and they give the board’s nominating committee a clear-eyed understanding of individual director performance and board-wide competency needs, which helps them create candidate profiles, build extensive pipelines of potential new directors, and generally ensure the board’s ongoing alignment with the company’s evolving strategic goals.
In short, a strategic board succession process is crucial to the success of the modern board.