Succession planning has remained an important topic in corporate governance for many years, with particular attention being paid to how a nomination committee, the chairman and the company secretary search and select non-executive directors.
The UK Corporate Governance Code makes clear that: “The board should satisfy itself that plans are in place for orderly succession for appointments to the board and to senior management, so as to maintain an appropriate balance of skills and experience within the company and on the board and to ensure progressive refreshing of the board.”
In other words, boards should be thinking ahead, perhaps 12 or 24 months in advance, about who they want on the board and why.
Carl-Henric Svanberg, chairman of BP, has, in my view, provided one of the most coherent and proactive ways to address this requirement: not only does he plan ahead, sometimes a few years in advance, but he personally contacts potential candidates to ask whether they’d be interested in joining the BP board.
Throughout this process the nomination committee plays a key role, working hand in hand with the allocated headhunters. This is welcome and representative, I believe, of a refreshing take on “succession planning”.
There are of course examples where this doesn’t always happen. For instance, it is surprising, in my view, that the (now former) chairman at Tesco did not identify one glaring oversight in its board competency: that of any substantial retail expert.
This wouldn’t have directly prevented the financial problems at Tesco, but might have helped the board reflect a bit more about the emerging threat of Aldi and Lidl.
But it is not always as simple as this. What happens, for example, when a non-executive is forced to leave the board unexpectedly? A multitude of scenarios will suddenly occupy the mind of its chairman and the nomination committee: how quickly should they act to the fill void? Do they seek a like-for-like replacement or someone different? Does this represent an opportunity to completely refresh the board, root and branch?
It is of course always more complicated, and although one can never avoid these types of unexpected departures, common sense should dictate that forward planning and a little bit of thought by the chairman, in conjunction with their headhunters, will prevent any major surprises down the line.
So, let’s take a worst case scenario for a chairman: a couple of non-executives suddenly decide to leave the board of a company, without any notice or due consideration for the company or its shareholders.
Unfortunately, for HSBC at least, this is exactly what happened in October 2014. Alan Thomson, a member of HSBC’s UK audit and risk committees, and John Trueman, deputy chairman, decided to quit the board, citing incoming banking regulations as the reason for them leaving.
There was nothing to prevent this from happening, but how a company acts afterwards reveals a lot about its succession planning and, more broadly, its approach to corporate governance. Good practice should dictate that an independent review of its board composition should take place quickly, understanding clearly who they need in place.
The chairman and the company secretary should then work with their appointed headhunters to draw up a long list of potential candidates. Thereafter, the headhunters should screen candidates accordingly, before putting forward a shortlist for the company secretary to consider.
How quickly this happens is dependent on a multitude of factors: the urgency of the brief, the pool of suitable candidates and their availability to go through the interview and screening process. From my experience, this typically takes about three months, but it can of course be much longer.
Things to consider
You can never, of course, prepare for every scenario but there are, I believe, a few basic things all boards, regardless of their size and composition, should consider:
- Plan ahead: consider further potential regulatory or business environment changes that may impact directly or indirectly on your board.
- Engage an external company to provide a board evaluation. All FTSE 350 companies are required to undertake a board evaluation every two years, but this does not always happen. Evaluation of the board should consider the balance of skills, experience, independence and knowledge of the company on the board, its diversity, including gender, how the board works together as a unit, and other factors relevant to its effectiveness. This would give the chairman, therefore, a greater independent understanding of board suitability and fitness. Chairmen should, as the governance code makes clear, “act on the results of the performance evaluation by recognising the strengths and weaknesses of the board and [importantly] proposing new members by appointment or seeking the resignation of directors.” This crucial information will also help the chairman determine what training, experience, and mentoring is needed.
- Always evaluate previous succession planning efforts: make suggestions and recommendations for improving the process so that it runs more smoothly next time. If all goes as planned, the succession planning process will ensure a smooth transition and a new leader who is prepared for his or her role in the organisation.
Ultimately, there is no substitute for planning ahead. There will be occasions when this doesn’t work, but ensuring you think strategically about your board and its members will help you avoid situations where non-executives choose to walk out.
Succession planning is, at its very basic, a means for an organisation to ensure its continued effective performance through leadership continuity. It is not sufficient to select people in the organisation who seem “right” for the job.
Whilst it is, of course, very important that experience and duties are considered, boards should also consider personality, leadership skills and readiness for taking on a non-executive role. With increasing regulatory scrutiny of directors, this will become ever-more important going forward.
Oliver Parry is senior corporate governance adviser at the Institute of Directors.