The business environment is rapidly and fundamentally changing—and directors are expected to keep pace. In response to this state of extreme volatility, the Report of the NACD Blue Ribbon Commission on Building the Strategic-Asset Board explores how boards can position themselves to capably usher their companies into the future by focusing on continuous improvement. At the 2016 NACD Global Board Leaders’ Summit, Commission co-chairs Bonnie Hill, director of California Water Service Group and former Home Depot lead director, and Richard H. Koppes, director of NACD and the Investor Responsibility Research Center Institute and former deputy executive officer of CalPERS, discussed the Commission’s key findings with NACD Director of Strategic Content Development Robyn Bew.
Members of this year’s Blue Ribbon Commission came to a consensus early in their discussions that “board refreshment”—an increasingly popular term in the corporate governance community as various stakeholders turn their attention to board composition and director turnover—is a limiting, and even simplistic, concept. Instead, directors need to figure out how they can make themselves strategic assets to the companies they serve by instilling a continuous-improvement ethos into the culture of the boardroom. Over the course of the conversation, Hill and Koppes suggested that directors consider the composition and functionality of the boards in the following ways:
How do directors’ skills need to align with company strategy? Businesses evolve rapidly, and boards need to respond in kind. Here, directors need to consider how they are keeping abreast of the issues facing their organizations and whether the skills that initially garnered them a seat at the boardroom table still align with the current and future direction of the company. Sometimes this means deciding to leave the board.
Internally, new-director onboarding practices provide an opportunity to communicate about the board’s culture and governance principles, including reinforcing the idea that board service is not a lifetime appointment. Externally, boards can communicate to stakeholders that a director’s departure was in keeping with the board’s governance practices and does not reflect poor service on the director’s part.
What are the board’s processes for continuous improvement? Maintain a pipeline of boardroom talent and have a multi-year succession plan in place so that open board seats can be filled with highly capable candidates. These plans should include designating successors for committee chairs and the independent chair or lead director. For sitting directors, continuing education programs can help to refine or amplify skill sets. Evaluations, including at the individual-director level, are essential tools for continuous improvement when they are conducted regularly and periodically involve an independent third party. They help ensure that the board’s processes are functioning well, enable directors to be more nimble in their own self-improvement, and ultimately fine-tune the board’s strategic contribution to the organization.
How do stakeholder perspectives affect the board? Shareholders—especially institutional investors—are paying closer attention to issues surrounding board composition. Considering that institutional investors read thousands of proxies each year, the onus is on individual boards to effectively communicate how each director makes valuable contributions. More and more leading boards are going beyond the basic biographical information required by the SEC and listing exchanges and providing additional context. In addition, if there is any concern that a director slate could be a point of concern for investors, boards should reach out to those constituencies well in advance of proxy season to explain their position. Should investor dissatisfaction with the board lead to an activist engagement, panelists agreed that, while sometimes both parties ultimately agree to disagree, the board needs to hear out that point of view and seriously consider if their position might add value.
For detailed recommendations on how to enhance your board’s continuous-improvement processes in seven key areas, download the Report of the NACD Blue Ribbon Commission on Building the Strategic-Asset Board. In addition, read this article from the current issue of NACD Directorship magazine for more insights from Bonnie Hill and Richard Koppes on the creation of the report.
CEO succession planning is one of a board’s most important responsibilities. However, many companies are unprepared for communicating executive transitions. A recent survey of senior-level corporate executives published by Alix Partners shows that about 50 percent of respondents felt their companies were unprepared for CEO succession, either because the company hadn’t identified possible successors or hadn’t sufficiently trained candidates for the top job.
Communications strategy is an integral part of CEO succession preparedness. Executive transitions can unfold quickly, demanding decisive action in developing the proper message and coordinating communications strategy both internally and externally. When thinking about a possible transition announcement, there are several foundational elements for successfully positioning a senior executive change.
Why is the CEO leaving?
There are a handful of standard reasons a company gives for an executive’s departure. Whether a CEO retires, steps down, is terminated, decides to spend more time with family, or pursues new opportunities, companies must present a clear rationale for the departure. Given nuances in language that could imply the motivations of the executive and company, word choice is especially important. Transitions that appear confusing, mysterious, or acrimonious will spook investors or stoke speculation.
In the age of investor activism, boards look for opportunities to demonstrate they will take action when a CEO is viewed as underperforming. This may lead to a press release that does not shower the outgoing executive with praise, therefore signaling a less-than-favorable view of the executive. Or the announcement may state the departure is by “mutual decision,” again a clear signal. Communicating CEO departure is a delicate balancing act.
When is the right time to communicate about a succession?
CEO transition announcements generally take financial markets by surprise and create immediate concern. As a result, some companies have found ways to prepare advance messaging for a planned transition to precondition the market to a future change.
For example, Kinder Morgan made a quick reference to a future CEO transition in its comments at an investor conference before an established timeline or formal announcement had been made. In another example, when dealing with a series of executive changes over the course of 15 months, Mack-Cali Realty Corp. issued an update about its executive search process six months after the CEO stepped down. Ultimately, the company named its new CEO, COO and president, CFO, and chief legal officer and secretary in one release. It should be noted that Mack-Cali’s case is fairly unique; in proprietary research, Edelman found the majority of companies identify a successor in the initial transition announcement. However, companies stand to learn from Mack-Cali and Kinder Morgan’s inventive approaches to communicating succession plans.
Who gets quoted in the release?
The presence of executive quotes in the release about their departure is another important signal of behind-the-scenes dynamics. If the outgoing CEO is quoted, this suggests some deference to that individual, especially if their quote comes first. If the chair or lead director praises the outgoing CEO in their quote, that again sends a message. However, if the chair makes a statement along the lines of “It’s time to take the company to the next level,” dissatisfaction with current leadership may be signaled to the audience, despite other symbolic cues in the announcement.
What’s the appropriate way to share the announcement?
CEO transition press releases tend to be brief, typically under 150 words. In addition to announcing via newswire, companies will notify their internal audiences directly at the time of the company’s external news announcement, and, if applicable, will also publish the news via their owned media channels (as in the case of Reddit and Twitter). Failure to get ahead of the news can make a company the target of speculation, as was the case with Proctor and Gamble (P&G) when the Wall Street Journalreported a likely scenario for P&G’s leadership transition based on analyst sources.
Employees should be briefed at the same time as the company’s news announcement, so that employees learn about the leadership change and plans for the company’s future from the source and not via the press.
How can companies leverage the media?
CEO transitions typically raise many questions with internal and external audiences, and the media is often quick to report on perceived corporate instability. Companies should consider a proactive strategy to ensure their messages around a leadership transition are understood and conveyed in the first wave of media coverage. A common strategy is to pre-brief a trusted reporter or two to secure a more holistic or accurate story at the outset of the announcement, with an embargo time established to coincide with the press release timeline. Another option is to hold a post-announcement briefing with reporters to provide greater context and answer questions.
How can companies mitigate concerns about financial performance?
The first likely question from the investment community when a company announces a CEO transition is “Does this mean the company will underperform projections?” Companies should consider reaffirmation of their financial guidance if possible at the time of the announcement. Another approach is to package the CEO succession announcement with a quarterly earnings announcement. This approach allows the company to simultaneously address any questions or concerns about financial performance.
As boards develop their transition plans, they will be best prepared for changes at the top of the organization by considering their communications approach as early in the process as possible. During transition planning, communications staff can develop materials to guide executives through a successfully executed exit process that establishes a positive narrative for both the outgoing and incoming CEO alike.
Lisa Schultz McGann is a senior account supervisor in the Financial Communications and Capital Markets practice at Edelman, the largest PR firm in the world.
The final session of the Diversity Symposium at NACD’s 2015 Global Board Leaders’ Summit focused on the Report of the NACD Blue Ribbon Commission on the Diverse Board and how directors can implement recommendations from that report in their own boardrooms. Kapila Kapur Anand, a partner at KPMG LLP and the firm’s national partner-in-charge of Public Policy Business Initiatives, led the discussion with panelists that included Anthony K. Anderson, retired Ernst & Young LLP vice chair, executive board member, and Midwest and Pacific Southwest managing partner; The Hon. Cari M. Dominguez, a director at ManpowerGroup, Triple-S Management, Calvert SAGE Fund, and NACD; and Karen B. Greenbaum, president and CEO of the Association of Executive Search Consultants.
As the Blue Ribbon Commission that produced this groundbreaking 2012 report observed:
[A] company’s ability to remain competitive will rely on its understanding of global markets, changing demographics, and customer expectations. Diversity is a business imperative, not just a social issue. The new business landscape will require boards to cast a wider net to find the very best talent available. As a natural corollary, the board’s mix of gender, ethnicity, and experiences will likely increase.
Dominguez noted that structural, social, and habitual barriers may prevent boards from becoming more diverse, and she offered this key advice: Don’t rely solely on the company’s CEO to lead this conversation. It’s the responsibility of every director to move the discussion forward.
So why aren’t boards as diverse as they could be? Greenbaum addressed this question by referring to data she collected via a survey of both boards and search firms. Her findings surfaced five issues:
Candidate pool. Boards contended that it was difficult to find diverse candidates. Horn countered this claim by asserting that a failure to find qualified candidates is more a function of boards not searching correctly. Boards should demand that search firms provide a diverse list of candidates. Conversely, search firms take their cue from boards and expect them to be vocal about the importance of having a diverse candidate pool.
Term limits. A lack of term limits results in a situation in which boards cannot be routinely refreshed with new directors. If term limits are restricting opportunities to bring on new talent, consider expanding the board.
Experience: Boards resist adding members who are not current CEOs or CFOs. Boards need to be open to first-timers and should develop strong mentoring programs to bring newly minted directors into the fold.
Succession planning: Build a pipeline of diverse talent in your own company so that these leaders can serve not only in your boardroom but also in those of other organizations.
Status quo. Boards can become complacent about how they operate, especially when they feel no pressure from shareholders or other stakeholders to change.
“All of us must be conscious that this is a leadership issue,” Anderson said. “If the leadership of a company doesn’t believe in diversity initiatives, the ability to make much happen is grossly inhibited.” Companies with a diversity strategy that touches on leadership, employment, and procurement are reinforcing the importance of diversity as part of company culture, Anderson added..
Creating change takes time, effort, and formal processes. Putting diversity on the agenda may require a shift in thinking and habits, but, as all of the panelists agreed, diversity is a business imperative that will only grow in importance over the coming years.