28 September 2015
Time to look strategically at succession planning, say Jay Bevington and Melissa Reid
This summer’s FT–ICSA Boardroom Bellwether survey of the FTSE 350 found that only 54% of respondents have a written succession plan for the board. Although this is an increase from previous reports, it is not as significant as could be expected given the Financial Reporting Council’s current focus on succession planning.
Succession planning is all about taking a step back from the board composition as it currently stands and seeing it for what it could be. A number of questions should be asked. For example, does the board have the right skills and experience to oversee the organisation in light of its future strategy? Could it have more impact on the organisation? Where are the improvement opportunities? The nomination committee is the key to identifying and seizing these opportunities, as well as managing the sensitivities around the process.
Here are some of the areas the nomination committee should consider in developing a succession plan for the board:
1. Clarify roles and responsibilities – formally document the responsibilities for the board and nomination committee and identify who has responsibility for key board roles. For example, the senior independent director will have a critical role in leading the process for finding the chairman’s successor.
2. Formally document the plan, associated policies and processes – the outcome of the succession planning process should be a written plan that is approved by the board. This should be supported with detailed policies and procedures to ensure a robust and objective process for both internal and external appointments.
3. Understand existing board culture and dynamics – succession planning at board level is a highly sensitive matter. It is important to be aware of existing board culture and dynamics and understand any sensitivities around appointments. Committee members will need to have candid conversations with board members, which can be difficult for underperforming or long-serving board members.
4. Conduct a board skills analysis and identify future requirements – the committee should assess the board’s skills to determine its strengths and identify gaps, as well as networks that might be needed but are currently missing. It is critical to consider the strategic direction of the organisation when determining future requirements. Companies are entering different markets, changing business models and experiencing different risks. This requires different experience to govern the company. Think about the board’s need for diversity of gender, ethnicity and age (see ‘Board diversity’ graph).
To what extent does your company consider its board membership to be diverse in terms of wider business experience and geographical area?
5. Consider timings and where possible plan in advance – be aware of the current tenure and desired length of service of each board member. Where possible, agree dates for departures well in advance and try to avoid key leaders departing at the same time to maintain some continuity – it is not ideal to be finding replacements for both the chairman and CEO.
6. Think strategically and plan for various scenarios – good succession planning looks at the strategic long-term needs of the whole board, not simply replacing individual directors. The committee should also be prepared to react to a range of situations and have contingency plans in place. There are many factors that can compromise your ideal board succession planning scenario, among them illness, poor performance, or an organisation crisis.
7. Engage key internal and external stakeholders – early engagement is key. Determine the integral stakeholders involved in succession planning for the board and agree the mechanisms and timing for communicating with them. Engagement with external stakeholders, such as shareholders and regulators, will vary and depend on the organisation and its circumstances. For example, a regulator may be required to approve the appointment and want to know potential candidates in advance.
8. Consider the need to use an executive/non-executive search firm – this can help the board find the right fit for a position. The decision to engage a firm can be made when developing the succession plan.
9. Utilise internal support – the committee should have internal support to develop the plan and manage the process. This is usually the company secretary or HR director, who regularly attend meetings and are familiar with the processes and governance requirements.
10. Continuous activity – succession plans should not be a static document reviewed on an annual basis. The committee should continuously review their leadership knowledge and associated risks, updating their board succession plans accordingly (see the succession plan review graph below).
How often does the nomination committee review your succession plan(s)?
There is no doubt that board composition will remain in the spotlight and be scrutinised by investors, regulators and the media. Now is the time for boards and their nomination committees to take a step back and look strategically at board succession planning.
Jay Bevington is a partner and leader of the UK Board Advisory Practice at Deloitte and Melissa Reid is a senior manager in the Board Advisory Practice at Deloitte