Succession planning is one of the higher priorities of board director duties. Some governance experts place succession planning in close proximity to strategic planning and oversight. Ultimately, boards function best when the nominating and governance committee works to align the board’s composition with the company’s succession planning strategy.
Most boards work hard to develop good dynamics, collegiality and a sense of trust. Without periodic board director turnover, however, even the best boards can become stagnant. Only about 5% of S&P 1500 boards have term limits. As a result, the average age of board directors keeps rising. Some governance experts believe that, in most cases, board director turnover is too slow for the times. Boards need the right composition to address issues in these rapidly changing, challenging times.
While it’s a common belief that succession planning is part of best practices for good governance, the majority of boards fail to practice it. According to a KPMG Board Leadership Center survey of 2,300 board directors, only 14% of them stated that their boards had detailed succession plans.
Succession planning can be challenging and it takes time away from other board activities, but those aren’t valid reasons for avoiding it. One of the difficulties in succession planning is that boards need to consider their current needs and also forecast the needs of the board for the next three to five years. To save the board’s time, boards often set up a nominating and governance committee and delegate the task of succession planning to them.
Basics of Succession Planning
Typically, nominating and governance committees are the best group to manage succession planning. Boards may also delegate the task to the board chair, the lead board director or someone else. The CEO may have important input on the succession planning process, so the board should decide how to coordinate the CEO’s perspective into the process.
Regardless of who facilitates succession planning, board portals provided a secure online platform to see the process through from start to finish.
Many boards make the mistake of evaluating the departing board director’s skills and expertise and look for someone with similar qualities to fill the vacancy. It’s important for succession planning committees to be cognizant of the board’s current needs and the potential needs of the board over the next three to five years and to use that information when recruiting board candidates. Before making a determination of the skills that the board needs, boards must decide the central question of where the company is going. The answer to this question may lead boards to determine that what they really need is to add a new board director, rather than replace one.
Assessing future needs in a rapidly changing environment is challenging. As part of the process, boards need to anticipate whether they expect to have major executive leadership changes within the next three to five years. If so, the board also needs to consider how the board will complement the skills of the incoming leadership.
Board assessments can be a great starting point for the board to gain understanding of gaps in the board’s skill set. Especially during times where boards feel challenged by finding the right board directors, boards will learn much about themselves when they do a full board assessment, as well as individual board director assessments.
Certain leadership qualities are important for all boards. It’s helpful for boards to recruit board candidates who have the potential to serve as board chair. Today’s boards also need to have a strong leader who is also forward-thinking to lead the nominating and governance committee. Among other things, best practices for succession planning encourage boards to prioritize diversity, as well as independence, on many levels.
In addition to gaining an understanding of how to compose the best board possible, the board must consider the expectations of the shareholders on board composition. Shareholders can be very critical of board appointments, so it’s helpful for boards to consider their perspective.
Pros and Cons of Recruiting Younger Board Directors
Companies that adhere to best practices for governance and succession planning know that it’s important not to overlook board candidates who are younger than the average age of its board directors. There are pros and cons to appointing younger-than-average board directors. Board directors who became executives at younger ages tend to know more about technology and social media platforms than long-time board members, which can help to give boards a competitive edge.
While younger board directors can be an asset to boards, the lack of board experience can be a deficit. Those who can contribute to broader work beyond their area of expertise may have an easier time adjusting to board service than those who bring only a niche talent to the board.
Younger board directors may also lack the benefit of expanded business associates and networks that more seasoned board directors have. They may also have difficulty adapting to a role that is primarily oversight in nature.
Young directors aren’t the only ones who need to make adjustments. Boards that have worked together for many years may have difficulty accepting a younger board director. Knowing the advantages of having a younger director may be overlooked in practice because of the fear of disrupting a deeply ingrained board culture.
Developing a Recruitment Strategy
The first step in developing a recruitment strategy is reviewing and confirming the board’s desired expertise and qualifications. The nominating and governance committee can use that information to identify potential board director candidates. Succession planning was not intended to be a last-minute endeavor. Nominating committees should approach candidates early in order to express the board’s interest.
Boards should consider diversity of ethnicity, gender, race, perspectives and thought processes. Independence is another quality that boards should consider in their potential candidates. Search firms can often streamline the process of succession planning, especially when boards need to fill a vacancy within a short timeframe.
Wrapping Up the Succession Planning List
In past years, boards had a tendency to address succession planning only when a board director left the board. Boards that fail to plan for board refreshment are at risk of rushing through the process and possibly settling for less than the best possible talent. Advance planning allows boards to cast a wide net, which will increase the possibility of securing the best fit for the board.
While there will always be some natural attrition that leads to board turnover, advance succession planning gives boards the best shot at composing the highest-quality board.