Effective board succession planning is a hallmark of good corporate governance. Failure to plan can lead to significant disruption due to less-effective leadership, uncertainty over strategic direction and the loss of corporate memory.
Effective planning, on the other hand, can refresh a board, bringing new skills and new perspectives that will help the organisation respond to new challenges and opportunities.
It’s well-established that more gender-, culture- and skills-diverse boards are associated with better financial results. McKinsey’s Delivering through diversity report, for example, found that “Gender and ethnic diversity are clearly correlated with profitability”, with the strongest correlation being for gender (“Gender diversity on executive teams is strongly correlated with profitability and value creation”).
Board succession thus represents an ideal opportunity for any organisation to strengthen its strategic and financial position. In Australia, the ASX Corporate Governance Council (ASXCGC) recognises that “board renewal is critical to performance” and recommends nomination committees undertake:
- Board succession planning
- CEO and senior executive succession planning
- New director recruitment
- Induction and development programs for directors
- Board, committee and director evaluations
- Appointment and re-election of directors
Australian directors are getting younger, but the majority are still aged 60 years or older. In the coming decade there will be considerable turnover on boards, making succession planning more important than ever.
Regular board assessments will help organisations identify any gaps and keep succession plans up-to-date with the skills and aptitudes needed to ensure the organisation’s long-term success.
Audits should inform and regularly update a board skills matrix so that, at any given moment, the board understands its capabilities and is aware of any deficiencies. With these in mind, a list of potential candidates can be kept current. Especially for larger companies, it may be worth establishing an on-going relationship with an executive search agency, so that if vacancies arise unexpectedly they can be quickly filled.
Not every organisation includes the Chair in their succession plans. Every organisation should. Chairs typically – but not always –announce their retirement date well in advance. A sudden departure can impact share prices and market confidence. In such a situation, the ability to point to an existing plan and a suitable pool of candidates can reassure investors and regulators alike.
Appointing a deputy chair (often a board member) is a common practice but not always a successful one. Especially if your organisation needs to improve its performance, an external appointment can signal your intent to change.
CEO and exco succession
In Australia, average CEO tenure is five years, making it important for boards to have succession plans in place. In the short term, it’s important to establish in advance who will be appointed as acting CEO, to maintain business and strategic continuity.
In the long term, it’s important to understand your organisation’s needs so you can make an effective appointment. There are pros and cons for internal and external appointments; broadly speaking, internal appointments are more likely to perform better, at least over the short- and mid-term, while external appointments may be more immediately disruptive but a better choice when organisational change is needed.
Many boards have adopted matrices to capture current and anticipated future needs. Inevitably, boards will need members with the ability to oversee technological opportunities and risks, from adopting new systems (such as artificial intelligence, cloud-based systems and automation) to responding to technological disruption and innovation.
Succession planning should also consider the growing importance of environmental, social and corporate governance (ESG), which is increasingly seen as an overall measure of an organisation’s strategic posture and long-term viability.
Diligent has developed a template to assist with board succession planning. It tasks boards with assessing five key criteria:
- What position is being filled?
- Responsibility documents
- Director onboarding
- Planning for future succession needs
- Recruitment plan
The template reinforces the concept of ‘Modern Governance’, whereby a single, unified software platform provides a comprehensive toolkit to support secure, mobile and collaborative corporate governance practices. Going beyond boardroom papers, board reporting and board evaluations, Modern Governance also provides business intelligence.
By analysing data from all parts of the organisation, a Modern Governance platform can produce practical, usable business intelligence. It can reveal new opportunities– and new risks – so it’s imperative to ensure that your board of directors has the skills and diversity needed to respond strategically and effectively.
Refreshing your board with new skills and new perspectives can give your organisation a new lease of life. From evaluating your current board to implementing new tools for corporate governance, we’re committed to your success.
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