Recently, Patricia Lenkov wrote in Forbes that COVID-19 had reinforced the importance of ongoing executive succession planning as well as board succession planning. Could not agree more, with emphasis on ongoing. What follows are some suggestions for making that happen – starting with agenda planning. These apply to public companies and, in only slightly modified form, to private companies as well.
Planning the Board’s Role in Executive Succession Planning
Including executive succession planning in boards’ annual agenda calendars helps ensure that boards addresses this topic. The meeting following the review of the company’s strategic plan is timely for the compensation committee or full board to consider how the company’s strategic evolution should impact executive succession planning. But succession planning is only one element of boards’ larger Human Capital Management processes – rigorous performance assessments, coaching and mentoring, and career planning – in which boards play significant roles. Notably, boards should have input into C-Suite performance assessments. Also, directors can serve as coaches and mentors for high potential executives or rising stars. Career planning is especially critical to advancement of women and minorities – as a lack of rotations with significant P/L responsibility often impedes progress toward the CEO role.
Planning the Board’s Role in Board Succession and Refreshment
Board succession planning involves planning for both individual directors (the parts) and the board as a whole (the sum of the parts). Again, getting the time on the agenda for these important discussions is a critical first step.
Just as executives’ annual performance assessments are important to the executive succession planning process, annual director assessments (not saying what form they must take so long as they are rigorous) are important to board succession processes. These annual assessments need to be on boards’ annual agenda calendars. Annual assessments can reveal directors’ untapped strengths or aspirations as well as weaknesses that need addressing. Once recognized, untapped strengths and aspirations can be factored into committee assignment planning and committee chair rotation planning (yes, those committee members and chairs should rotate roughly every five years to help maintain a sense of director equality and shared responsibility). For those identified weaknesses, an astute Lead Director or Governance Committee Chair can work with the director to develop a training plan (then share that plan with the governance committee or board). It can be as simple as spending more time with relevant company executives or on location to learn more about the company, attending a director education session at focused on a substantive area in which the director is weak. Sometimes the issues are behavioral and require one-on-one discussions to address. If by the following year, those weaknesses remain, the governance committee or board will face a tough decision as to whether to renominate the still weak director. Increasingly, investors are interested in how boards conduct these annual assessments and what action boards take to address identified shortfalls. The desired information is easy to include in the proxy statement.
Identifying and developing committee chairs to facilitate timely rotations is another element of board succession planning. The assumption should be that all directors are capable of serving on any committee, though they might be stronger on one committee than another. But avoid assumptions about who is best for which committee; a director whose day job is leading a health care facility has much experience in process management that can greatly benefit an audit committee. Committee assignments and rotations should appear as an agenda topic on the governance committee’s annual agenda calendar.
Director recruitment planning is another element of board succession planning. As the company evolves, the board should too. In hockey, one skates to where the puck is going; the board should be building its future self for the future company. Increasingly, investors want boards to be diverse and include a mix of relevant experience (not to be confused with expertise), competencies, and perspectives. Investors are also looking for boards to disclose their rationale for why the current director mix is appropriate and how they factor diversity into recruitment. Investors are pleased when boards disclose their approach to recruiting for the future.
More investors are also pressing for term limits or other means for boards to foster refreshment. And boards are recognizing that board refreshment is the new normal. Investors are interested in learning about how boards are planning to ensure that the future director mix will be appropriate for the future company. Effective recruitment planning does not just happen – it needs to be on governance committees’ annual agenda calendars.
In sum, directors and boards shouls be lacing up their skates and taking on the sometimes difficult topic of succession planning.
For additional insights into director succession planning, see Board Development and Director Succession Planning in the Age of Shareholder Activism, Engagement and Stewardship by Sabastian V. Niles, Wachtell, Lipton, Rosen & Katz, on Friday, June 7, 2019 at https://bit.ly/3cxKV1Q
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