Topics:   Board Composition,Corporate Governance

Topics:   Board Composition,Corporate Governance

June 20, 2019

Looking Forward: Succession Planning Key to Accelerating Board Diversity

June 20, 2019

The slow pace of progress toward increasing the representation of women and minorities on public company boards is often blamed on lack of available seats. With directors routinely serving for 7 to 10 years, institutional investors and other diversity advocates are increasingly calling on boards to adopt governance practices that enhance board refreshment.

To date, boards have primarily responded by implementing mandatory retirement ages that typically range from 70 to 75 years old. Term limits too are being considered as a mechanism for stimulating board refreshment. They are presently much less common than age caps, however, with only five percent of S&P 500 boards specifying a term limit for non-executive directors, according to the 2018 US Spencer Stuart Board Index. While helpful, these practices are not enough. Thoughtful succession planning is also required.

Leverage a skills matrix. Being intentional about board refreshment is an important part of achieving a diverse and inclusive board. Accordingly, organizations with leading practices take a forward-looking approach to anticipating mandatory retirements as well as to filling sudden vacancies due to voluntary retirements, death or illness, non-performance, or any number of personal factors. This forward-looking approach often involves leveraging a skills matrix to understand the gaps in competencies, experiences, and perspectives that would occur if any given director resigns. Importantly, this matrix should be continually refreshed to ensure that desired and varied skills are present and align with the organization’s evolving strategy.

Cultivate a network. Beyond identifying potential gaps, leading-practice organizations develop a bench of diverse talent for filling them. Here, individual directors can make a big impact. Building the pipeline is a long-term game and directors can add value to their boards by cultivating a network of diverse rising leaders. Industry associations, professional organizations, and non-profits are excellent avenues for building these relationships.

Through involvement in these organizations, current directors and up-and-coming talent can work together and get a sense of what it would be like to serve jointly on a board. In addition, good, old-fashioned networking also has its place. Generosity of time and spirit in mentoring others who are different from you and understanding what their priorities are, perhaps over a meal or a beverage, can go a long way toward making connections that can be mutually beneficial several years down the road.

Widen the search aperture. Another leading practice in building a pipeline of diverse candidates is defining the search criteria more broadly. Board leaders are increasingly acknowledging that the traditional practice of primarily recruiting retired or sitting CEOs may not deliver the diversity of background, thought, and experiences needed to govern a complex company in today’s disruptive environment. Indeed, many institutional investors are speaking up in favor of expanding the search criteria, and some have declared their intentions to vote against CEOs who sit on more than one other board in addition to their own. Widening the search aperture to include people from the military, government, academia, nonprofits, and a broader set of C-suite roles can help companies not only to identify more female and minority candidates but also to achieve diversity of thought in a broader sense.

Flex up. Developing a slate of diverse candidates who can be immediately considered to fill vacancies is one way to advance diversity through succession planning. But another non-traditional method is also gaining traction. Increasingly, directors are keeping an eye out for talent that can add value to their boards, even when they are not planning for a specific transition.

The by-laws of some boards provide the capacity to “flex up,” or to increase the number of board seats for a period of time. For instance, a board may know that a director will soon be retiring. In order to facilitate a smooth transition, leadership will bring on one or two new board members 12 to 18 months in advance of the director’s departure. Or, a board may simply come across outstanding diverse candidates with valuable skills, either through networking or an intentional search.

By flexing up, the organization can seize the opportunity to add these valuable strengths and perspectives, while simultaneously achieving diversity. Research suggests that some boards may be taking this approach. According to the Missing Pieces Report from Deloitte and the Alliance for Board Diversity, the number of Fortune 500 board seats increased from 5,440 in 2016 to 5,670 in 2018, reversing a trend of flat to negative growth since 2010. 

Remember inclusion. No discussion of advancing diversity is complete without addressing inclusion. Leading-practice boards are very meticulous about not only identifying and recruiting candidates, but also onboarding them and providing mentorship so that they feel comfortable contributing to boardroom conversations. Targeted committee assignments are one way of encouraging fresh directors to lean into their new roles. For example, the audit committee may invite a new director who has extensive financial expertise to contribute their perspectives on financial reporting, risk, and internal controls.

Go the Distance

As more institutional investors speak out about the importance of diversity, and more boards understand the importance of inclusion to sound governance of their companies, having a succession plan that better matches their investment horizons—perhaps extending 5, 10, or 15 years into the future—may soon be expected, not simply preferred. But, proactive, long-term succession planning for boards can often be neglected amid myriad competing responsibilities.

To ensure a board continuously has the broad range of skills, experiences, and perspectives needed to govern a complex company today, the succession planning process has to be thoughtful, intentional, and thorough. This means it should start with cultivating a diverse bench of talent and move all the way through onboarding new directors. Whether by leveraging a skills matrix, flexing up, or some other means, going the distance on board refreshment is an essential component of achieving a diverse and inclusive board.

Deb DeHaas is a vice chair and national managing partner, Center for Board Effectiveness, Deloitte.

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