August 2010 Issue 4
BoardWorks International
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Taking a Structured Approach to Board Succession Planning

Boardworks InternationalA subject on which we have been asked to advise on increasingly in recent years is board succession planning. Given the performance pressures on boards it is a very positive sign that organisations are becoming less inclined to leave board composition to chance. We would argue that taking a deliberate and structured approach to director succession planning is as important in organisations where boards are ‘elected’ as it is in those where they are ‘selected’.  This article is in two parts to reflect the different challenges of these two situations.

Succession planning when boards are ‘selected’

Where board members can be selected on the basis of predetermined criteria a well understood and well structured process should be conducted as a matter of routine.  To that end there should be a formal director succession planning and renewal program in place. If the selection planning process is not conducted by the board itself but, for example, by an electoral college or dominant shareholder, the program should be conducted by that appointing/selecting authority, in association with the board. This program should be focused on identifying and recruiting new directors (perhaps even in advance of vacancies).  The primary purpose of this program is to ensure that the composition of the board is systematically refreshed to ensure the board contains directors with:

  • skills and experience relevant to the company's strategic direction and operating environment; and
  • the knowledge and ability to work with colleagues to deliver the high standard of governance performance expected by stakeholders.

When recruiting new directors it is important to be clear what competencies, skills and experiences are needed on the board and which ones, if any, are missing.  To assist in clarifying this information the board should ensure that there is an up-to-date director competency matrix.  The process of developing the matrix should describe the competencies, skills, and experiences of the current directors and the key ones required for new directors. 

Whether the board is the primary selecting authority or not, a board committee may be helpful in giving focus to this process. Committees with this responsibility are often referred to as 'nominating’ committees.

The key steps in the competency matrix development process are likely to be as follows:

  1. Assess what competencies the board needs given the challenges faced by the business and taking into account the strengths and weaknesses of the executive team. The roles and responsibilities of board and management are different but the capabilities of each need to be complementary. Consideration should also be given to weighting particular competencies. Note this first step is not an assessment of the competencies and skills the board currently contains. 
  2. Assess what competencies each existing director possesses.  This is done by asking current board members to self assess themselves and their colleagues relative to the matrix.  Those self assessments should be reviewed by, for example, the board chair or the nominating committee as some directors tend to be excessively modest while others overestimate themselves.
  3. Evaluate the extent of any competency gaps resulting from a comparison between steps 1 and 2. 
  4. Define a ‘recruitment specification’ for the competencies a new director would need to bring to the board to fill defined competency gaps. It is quite likely that a new director will need to ‘tick a number of boxes’. Consequently, it may be desirable, in the first instance, to develop recruitment specifications separately for

    • individual directors (reflecting generic governance capabilities);
    • board content specialists (e.g. to the extent that a director may be recruited to ensure there is a specific capability within the board); and
    • board leadership roles (e.g. board and committee chairs).

Candidates for the first two of these categories will be sought from outside the board but board leadership roles should, ideally, be filled from among incumbent board members.

Even though these will vary in importance according to organisational context, recruitment specifications should be sufficiently thorough that they will provide the basis to assess potential candidates’:

  • academic and professional qualifications;
  • relevant experience;
  • demonstrated ability;
  • understanding of the industry;
  • character;
  • personality and likely boardroom behaviours; and
  • ability to devote the time required.

In some contexts, competition for directors of the calibre needed is likely to be strong and the availability of suitable candidates limited both by actual numbers and potential conflicts of interest.  Therefore, consideration should be given to establishing and maintaining a list of potential appointees ahead of an active recruitment process. Identifying suitable candidates ahead of time facilitates a rapid response when either an unplanned vacancy occurs or when there a change in a potential candidate’s availability. In some situations it may be appropriate to approach such candidates well ahead of time to assess and engage their interest.  It was suggested recently by one client that boards often need to be ‘cleverly opportunistic’ with key board appointments.

Once the active recruitment process is underway, recruitment specifications can be translated into clear statements of the contribution expected of appointees and contained in a letter of appointment that also sets out relevant conditions (e.g. remuneration, tenure, etc).

Ideally, recruitment specifications would also become the basis of position descriptions contained within the board's own governance documentation (e.g. board charter).  This would facilitate transparency in the subsequent evaluation of appointees’ performance against applicable expectations.

Both recruitment specifications and position descriptions should be reviewed on a regular basis. They should be benchmarked against emerging organisational challenges and evolving thinking about governance best practice. 

Succession planning when boards are elected

There is a tendency for boards whose members are elected to be somewhat fatalistic about succession planning.  They seem to feel that it is a waste of time because matters are beyond their influence.  Alternatively, they feel that it would be inappropriate to attempt to influence an electoral process because that might be perceived as ‘manipulation’.  Our view, and that of a number of our clients, is that succession planning is perhaps even more important when boards are elected.  In organisations where board elections tend to be a popularity contest it is easy to end up with a board that lacks the wherewithal to do the job. 

To minimise that risk, the board's approach to succession planning should be about creating a transparent process and an informed electorate.  It can do that by following the same steps described above.  The equivalent of the 'recruitment specification' becomes an information memorandum that is made available to potential candidates and to the board’s electors. 

To avoid leaving it entirely to electors to make an assessment against such a specification, an added dimension in some organisations is an independent, pre-election assessment process.  Typically, all candidates for election would put through an assessment process (probably interview-based) that compares their candidacy against the desired director profile.  Often this assessment will be conducted by an independent panel which then publishes the list of candidates in rank order according to their fit with the succession planning criteria.  Electors can still vote for whomever they please - and for whatever reason. Should they wish, however, they can enjoy the benefit of being well-informed about the degree of fit each candidate has with the published criteria.

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