By Stuart R. Levine
Published In, Forbes
Succession planning has always been defined as the number one responsibility of board members followed closely by strategic plan development. KPMG conducted a global survey of 2,300 directors that showed that only 14% of directors had a detailed board succession plan , with no dramatic differences across the developed countries surveyed. This number is completely in sync with a recent webinar survey in which Dennis T. Whalen, Leader of the KPMG Board Leadership Center shared his insights. Only 12% were satisfied with their detailed board succession plan that had been implemented.
Dennis explains, “Board members think having a succession plan is good and important, but it’s hard to execute. The simple reason is that it’s hard. The composition of the board needs to be aligned with the strategy of a company. Making sure you have the right directors three to five years out is challenging, considering the stigma that is attached to rotating off a board.”
Boards have been spending a lot of time on strategy over the last few years due to the speed of technology, business disruptors, business activists, globalization, management turnover and economic/political instability. However, equally important for the board’s role is to tackle succession planning, both for the board itself and the CEO. If companies are required to continue to shift their strategies and re-evaluate their strategic thinking on an ongoing basis, the board’s composition needs to adjust accordingly.
Compounding this issue is that the age of directors continues to rise according to a Spencer Stuart study, Board Refreshment: Investors Respond to Trends in Mandatory Retirement Age and Tenure with More Stringent Voting Policies. Twenty-seven percent don’t discuss mandatory retirement or don’t have mandatory retirement ages and among the ones that do, half set the age at 72, but 75 is the new trend. Two-thirds of boards don’t have term limits and the percentage of those with 11+ years is increasing. Further complicating the issue is that for a board of 10 or 11 people, only one director typically turns over every three or four years.
So how can boards manage this process more effectively? Understanding your companies strategies and the skill sets that will be required for both board members individually as well as the CEO are critical. As the chairman of the Nominating and Governance Committee on public boards, I have often been asked which candidate do you like the most to serve on our board? The better question would be where is our company going, and what are the right skills for now and in the future to best serve the board’s ability to make the right decisions for our shareholders.
Finding directors with both significant general business experience and specific required experience is one of the greatest barriers to building and maintaining a high performing board. Hiring someone specifically for cybersecurity may not be the best decision for your board. Perhaps having them as an advisor for the board would make more sense. Having business astute leadership skills is critical. The inability to find both as well as the tendency to not want to add new public company directors if they have never been on a public company board, is another constraint.
When webinar participants were asked why their succession planning efforts were not optimal, 40% said that not enough focus was being placed on planning three to five years out. Another 30% said it was due to not enough time being allocated on the board agendas. If board refreshments don’t become a priority until someone is ready to retire, this doesn’t bring the right issues to the table with enough time to effectively plan for smooth transitions that strengthen board culture. Since board members typically work together for a very long time, there is a board culture or chemistry that evolves from their work together. Finding the right director to continue the desired board culture is an additional concern. Onboarding them potentially before a director departs is another way to ensure continuity and an effective transition.
Board assessments that are run by independent third parties, provide a look in the mirror at the board’s culture and should serve as a baseline for an intelligent conversation. Dennis Whalen adds, “It’s important to have real data from an independent source — to continue to understand what you do well and to reflect on where growth is needed. This is the wave of the future.”
How to address underperforming directors is challenging . Underperforming assets are not related to age, but rather the ability to continue to add value in light of the board’s changing strategies and skillsets required to serve effectively. A company that began in the financial services industry 10 years ago, may evolve into a FinTech company which requires completely different strategies and skillsets from a decade ago. Directors who can’t continue to learn and upgrade their skills prove to be of significantly less value now than then. Knowing the skills you bring to the board and continuing to ensure that these skills are relevant, is important. Proxy bios should outline and strategically communicate the value and skillsets that each director brings to the table.
Twenty-eight percent of participants shared that they believed people were too soft on grading their fellow directors. However 54% said that the issue of underperforming directors never gets addressed, leaving the shareholders not well served. Asking the senior leadership team what types of guidance would best serve their effectiveness, will provide valuable insights as well. It would well serve companies to provide directors with the opportunities to meet with senior leadership as well as their potential successors, to understand their values, strengths and competencies. Often directors can serve as mentors to CEO succession candidates, providing them with valuable continuing leadership development insights.
Almost 40% of webinar participants indicated that they do not have a formal succession plan for their CEO. Building a talent rich organization is a very important issue. Understanding the type of talent required and benchmarking your success at year end, helps to provide a longer view. Understanding the diversity of talent, employee satisfaction and the company’s bench strength, stimulates a succession planning strategy for the CEO and the company. Having this stimulating internal dialogue feels more collaborative and less punitive. Getting this onto the CEO’s dashboard with metrics around it, ensures that you can develop leadership internally, rather than seeking new hires from the outside.
The National Association of Corporate Directors, the standard setter for responsible board leadership, released the Blue Ribbon Commission on Building the Strategic-Asset Board late last year. It’s worth reading to understand how boards can establish new systems for continuous improvement in the boardroom as it relates to succession planning and other critical board responsibilities.