When the UK’s governance watchdog reported on the quality of reporting against the corporate governance code there were many issues highlighted, but a standout concern was succession planning.

The criticism is swingeing. A year on from last year’s critique of succession reporting, the Financial Reporting Council (FRC) says it has seen little improvement. Reports provide “minimal insight” and “little or no discussion on why the process was effective in ensuring the best candidates for the role could be found”.

Disclosures did not discuss how skills for the boardroom had been assessed. The watchdog wants to see “cohesion” between succession planning, diversity commitment and board evaluations, details of when searches would begin or how timelines would evolve.

Moreover, the lack of decent reporting not only worried regulators about board recruitment, “but how companies’ methods support the development of a diverse pipeline”.

CEO succession planning

The FRC’s concern is understandable. The UK’s corporate governance code says board appointments “should be subject to a formal, rigorous and transparent procedure and an effective succession plan should be maintained for board and senior management.”

And with succession closely linked to issues of diversity in the C-suite, both among executives and non-executives, how companies prepare, find and recruit members of the leadership team is a sensitive topic.

No more so than when it come to the chief executive. Most of what the FRC has to say about succession planning applies to the board in general but we know it becomes a particularly sensitive area when it comes to the CEO. Jitters abound as board chairs and nomination committees deal with the competing interests of keeping incumbents happy and unthreatened, spotting and encouraging talent internally and externally and ensuring shareholders are somehow aware of, but not unnerved by, the process.

It’s also not unreasonable to be concerned about chief executive succession given so much reliance is placed on a single individual to ensure corporate success.

Board practitioners and expert observers are well aware of the importance of CEO succession planning. “Plc boards, and boards in general, have a far more challenging dilemma when it comes to CEO succession planning in particular,” says Kieran Moynihan, the head of Board Excellence and an adviser to boards. “This is quite a difficult area that even quite experienced and capable boards struggle with, which is why you see so little guidance on this in the annual report apart from any commercial sensitivity considerations.” However, Moynihan adds that failing to have a decent succession plan for leadership is a “dereliction of duty”.

There are major issues around succession for leadership, not least the personality of the incumbent. CEOs tend to have “Alpha” type personalities that either find it difficult to accept anyone else can do what they do or feel threatened by the very idea of a board preparing for their departure.

According to Mark Freebairn, head of board practice at headhunters Odgers Berndtson, the pandemic may also have formed a significant block on succession planning as boards invested all their effort in company survival.

Common scenarios

Moynihan often sees one of three scenarios unfolding inside companies. One is what he calls the “over my dead body” situation where chief executives simply resist the need for planning, and is common in companies with “overly dominant” to “controlling” CEOs. The next is the tick-box approach, where the CEO and nominations committee is guilty of regular high-level discussion that appears to be succession planning but has very little substance beneath it.

The last option is the “sophisticated” approach where company chair, CEO and nominations committee work together to produce a “clear, well thought-through plan”.

Freebairn is optimistic, though he acknowledges some companies struggle. “There are more examples of good succession than there used to be,” he says.

He also observes that a lot of preparation and succession takes place away from the public eye. The appointment of a new external candidate may attract criticism as evidence of no succession plan but it may also indicate the outcome of much behind the scenes work to deal with the eventual loss of a CEO. Not all vacancies come about at precisely the right time for internal candidates.

Succession preparation can be well hidden. Freebairn offers the example of a search for a new chief executive which involved a series of “industry lunches” in which a chair could meet leading figures without arousing suspicion that it was part of a succession plan. That process led to an appointment. “Actually, it was one of the most effective and well-worked succession planning exercises I’ve ever seen. But no one had a clue,” says Freebairn.

However, an “open discussion” between the chair, CEO and nominations committees in which everyone recognises a CEO will not be around forever is a more “mature” route to succession.

“We all need to accept that we have to engage with the topic because it is self-evidently true,” concludes Freebairn.