Topics:   Board Composition,Corporate Governance,Leadership,Strategy

Topics:   Board Composition,Corporate Governance,Leadership,Strategy

January 23, 2019

Four Reasons to Cast Sunlight On Director Succession Planning

January 23, 2019

Sometimes, making decisions in secret seems like the easiest option. You don’t have to deal with other people’s opinions. You have a better chance of satisfying your own interests. You can move more quickly because you only have to sell your idea to one or two other people.

But the easiest option isn’t always the best one. Board leaders that take the backroom-deal approach to succession planning often suffer the consequences: impulsive appointments that don’t fit the needs of the organization, missed opportunities to add diversity, disgruntled directors who weren’t consulted, and board members who aren’t aware they have outlived their usefulness.

Letting in some sunlight on this process could alleviate many of these problems. Here are four reasons why board leaders should create a more transparent, inclusive succession planning process:

1. It fosters a stronger, healthier board culture.

Here’s a scenario I hear all too often. Some directors at a Fortune 200 company told me the other day they had received an email from the lead director that announced two new board members (bios attached) would be joining them at their next board meeting. The directors, who weren’t even aware a search was underway, were miffed about being left out of the process. “Why are we hearing about this after the fact?” they asked. “Why wasn’t our input solicited?”

This secretive, closed-door approach to board succession creates distrust among fellow directors and feelings of exclusion that erode teamwork and collegiality. It’s also a missed opportunity; the directors who were excluded from the process might have been able to suggest better candidates from their networks or make useful suggestions about the skills new directors should bring to the table.

2. It creates a higher-performing board.

Markets change. Technologies change. And companies change along with them, which means they may need directors with different skills than in the past. The succession planning process gives board members a chance to imagine their board dream team, then create profiles of candidates who would help make the dream a reality.

The nominating and governance committee can use the planning process to assemble a board skills matrix that outlines the abilities, experience, and attributes of current directors against the company’s current and future needs. The full board should discuss and debate this matrix to reach an agreement on what skills are important today and what skills will be crucial in the future. Then, they have a clear profile for the types of candidates they are looking for.

When boards plan ahead on succession, they can also build in considerations like committee chair rotation by mapping out a timeline of when current board leaders are likely to retire or need to rotate, which gives the board plenty of time to find suitable successors. By thinking ahead, boards can arrange to have new directors and committee members shadow the incumbents and gain valuable insights before assuming their positions.  

3. It tackles the issue no one wants to talk about: board refreshment.

Nearly half of the directors in PwC’s 2018 Annual Corporate Directors Survey think at least one fellow board member should go, but few lead directors feel comfortable initiating retirement conversations. Because boards are composed of peers, they are unaccustomed to giving each other honest feedback. When a director isn’t pulling his or her weight, or their skills have become less relevant, board leaders have a tough time broaching the subject. “What do we say?” they worry. “How do we explain it to them?” So, they end up saying nothing.

Being transparent about succession planning makes having these difficult conversations easier. While developing the board skills matrix, everyone on the board can see whether their expertise and experience fits with the company’s strategy. This provides board leaders with context for having conversations with directors whose skills don’t match the organization’s future needs. Those directors are less likely to be surprised when approached about retirement and less likely to take it personally.

4. It satisfies stakeholders—the right way.

As investors continue to challenge boards on their composition, those that lack strong succession plans may rush to assemble more diverse teams only to end up with a hodgepodge of directors who may not work well together or understand the company’s operations. Advance succession planning gives boards the opportunity to be strategic versus reactive and take the time to find candidates who not only tick a diversity box but also bring key skills and talent.

By building relationships with promising candidates in advance of an actual vacancy, boards can cast a wider net and recruit talent with a diverse array of valuable experiences and perspectives that align with the company’s long-term strategy.

Opening Closed Doors

Boards that don’t have a formal succession planning process often scramble for replacements and waste opportunities to be more thoughtful and deliberate about their recruitment process. When lead directors don’t involve the entire board in this effort, it can create distrust and resentment. For boards that have historically taken a closed-door, ad-hoc approach to choosing new members, the shift to transparency and planning can be a major adjustment. But the long-term gains of having an open process will make the effort worth it.

For further guidance on this topic, see PwC’s The Road to Strategic Board Succession.  

Paula Loop is a partner with PwC and the leader of PwC’s Governance Insights Center, which strives to strengthen the connection between directors, executive teams, and investors by helping them navigate the evolving governance landscape.

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