Board Succession (Refreshment) is a fraught issue in the UK, as change has been delayed at most boards, according to recent research. Changes in the role of the Nominating Committee should lead to its taking a more active approach to evaluating skills requirements and in selecting new members. Greater transparency with shareholders for the succession process is also desirable.
Succession (Refreshment): A complex challenge
As Board Director Janice Case points out, board succession (refreshment) is a complex challenge. “Boards need new members for a number of reasons: Retirement of previous members is only one; need for new skill sets is another; ability to meet the requirements is a third”.
Case points out that being a board member today is a full-time job, involving homework, certification, committee work and a wealth of tasks to perform.
“Directors who can no longer take on all the responsibilities need to be replaced, and new members found with both the abilities and the time to do the job”, she adds.
The UK Context
This issue has come to the fore in the UK, where, due to long terms without succession (refreshment) planning, boards are getting older. There is an informal rule in the UK that directors should not remain on a board longer than nine years, but that rule is not being respected.
The average age of directors continues to rise slowly but steadily, according to statistics from consultancy Spencer Stuart. The average age of non-executive directors has increased by 1.9 years since 2006 (to 59.6 yearsfrom 57.7). The average age of executive directors has increased by three years since 2006 (to 52.8 from 49.8). Average ages on individual boards range from 48.1 at Just Eat to 65.7 at RIT Capital Partners.
Spencer Stuart expresses concern about the quality of refreshment (succession) planning for UK boards of directors.
“We are still concerned that the quality of reporting on the nomination process, board composition and diversity remains variable — the manner in which a company reports on the skills of its board members and its nomination process for board refreshment is a reflection of how much this matters to the board”.
Role of the Nomination Committee
The Nomination Committee plays a key role in boardroom succession (refreshment) at most companies. A recent study by the UK Financial Reporting Council, which is responsible for the British Corporate Governance Code, shows that the role of that committee needs to be changed.
The study called for a clearer definition of the committee’s purpose and responsibilities. “The committee should also be required to report regularly on what it has done during the year and what it thinks went well, with links to specific decisions where possible. The committee should also detail what it has done for the board recruitment process, including:
- information on external advisers, search, and selection criteria
- having greater detail of the process that the committee uses to judge future candidates against the role profile and skills/experience matrix
- board biographies, directors’ relevant skills and competencies, and contribution to board performance to give an overall picture to justify their re-election
- having more information on how the pipeline of talent is managed, and how this works to support succession (refreshment) planning at senior levels; details of the initiatives in place to promote diversity in board and executive appointments, including having an explanation of why the committee is comfortable that the board is suitably diverse
- the outcomes of the board evaluation process, its proposed actions, and progress with actions from the previous year
- indicating the existence and review of contingency plans to deal with sudden and unexpected changes in directors; and a statement of whether succession arrangements are in place for all board members and key management”.
Accountability to Shareholders for Board Succession (Refreshment)
The report also called for increased transparency in the succession (refreshment) process, so that it could be subject to broader discussion among shareholders.
The chairman, and the Nomination Committee, should seek to create a ‘level playing field’ across investor classes and sizes, as currently only some of the largest investors have access to boards to hold private discussions about finding new directors.
The Nomination Committee report should contain enough information – subject to commercial sensitivities – about how it is proactively managing talent and thinking about the skills and experience needed in the future.
Agenda for Planning Board Succession (Refreshment)
Many companies support the idea that, at a minimum, the director succession planning process should become a routine topic of discussion by the entire board, not limiting it to the Nomination Committee. The board as a whole should encompass how to address, in an efficient manner, both expected future board retirements or the occurrence of unexpected director turnover as a result of death, disability or untimely departure, as well as director turnover either through transitioning off the board or as a result of rotating committee assignments and leadership.
The board should also provide for a mechanism to solicit shareholder input on succession (refreshment) issues. There should be regular reports to shareholders on these issues, so that there is no danger of jeopardizing the implementation of an effective and timely director succession plan.
As one recent study points out: “Director succession (refreshment) is generally most effective when reviewed and planned for in an assessment framework on a regular basis. Such framework may involve board, board committee and director self-assessments, including assessing the current strengths and weaknesses of the board and each board committee, identifying the short- and long-term skills needs of the board (in light of the company’s corporate strategy, evolving risks and shareholder and other stakeholder concerns), evaluating how the board’s assessment changes when retiring directors are factored in the analysis”.
There should be a shift in the board’s approach of automatically re-nominating existing directors to one that bases a director’s re-nomination on a number of criteria, such as the board’s evolving needs and director performance. Once the board reaches a consensus as to its current and anticipated needs, it should develop a candidate profile and initiate the process of identifying qualified potential director candidates.
Diligent Boards supports effective governance
To ensure effective boardroom consideration of all issues, including succession (refreshment), Diligent Boards provides the ideal environment.
Diligent Boards moves all of the agendas, documents, annotations and discussions of board meetings online into one intuitive, secure portal. The platform goes beyond digital board books to manage the full scope of a board’s moving parts—committees, contacts, voting, reporting and more.
With Diligent Boards, on-the-go directors will have more than iPad board meeting software at their fingertips. From a single sign-on (even for multiple boards), they’ll be able to work across devices (with real-time syncing) to: stay current, communicate and search an online library of updated materials. Access is possible from anywhere in the world, with local customer service, using any device on a major operating system.
Diligent Boards offers the highest level of security, with all communications encrypted and threat protection updated to the latest level of technology. Board members can message, chat and converse in total safety, and recording is available to simplify record-keeping.
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