What Directors Think: Part 3
Ironically, despite the earlier finding noting that two-thirds of directors believe it’s important to refresh the board, they rated themselves least effective in terms of the nominating/governance committee’s process to effectively encourage board turnover and to create a board that has a balance of needed skills and diversity. Other relative weaknesses noted by respondents include the full board’s ability to complete a management succession plan and to monitor the organizational risk management plan to mitigate exposure. It’s worth noting that two of the bottom four results in this category are related to board composition and turnover challenges, indicating many directors are attuned to the fact that these important areas need more attention in the future.
“Spencer Stuart’s research shows the number of new board appointees fell by 23% in the period between 2008 and 2012. While there was a 16% uptick in the number of new independent directors elected to S&P 500 boards during the 2013 proxy year (339 directors), boards continue to wrestle with the question of how to promote ongoing board renewal,” Daum says. “In our experience, making board composition and performance an annual topic of board discussion is a good approach to ensuring the board has the right expertise and skills as the economic and competitive landscape changes.”
In analyzing the methods used by boards to encourage healthy turnover, 85% of directors surveyed said board assessment/evaluation is an effective tool to encourage board refreshing. Boards use annual board evaluations to assess the effectiveness of the board as a whole as well as the contributions of individual directors, which can identify directors who are underperforming or whose skills no longer represent a good fit with the strategic direction of the business. Forty-nine percent cited the use of an age ceiling and 24% chose term limits as a means to bring on new members (Figure 2).
“Whatever the tool, boards should ensure they are having a regular dialogue about whether the expertise and diversity of perspective around the table reflects the strategic vision for the organization,” says Daum.
Finally, in the area of board performance and effectiveness, we surveyed directors’ views on director education. Nearly three-fourths of those surveyed (73%) said they receive reimbursement for attending an educational program they anticipate will make them a more effective director.
CHOOSING COMPANY LEADERS
Since this study’s inception in 2002, succession planning has continually topped the list of challenges for boards, and this year was no exception: 10% of respondents said they were “poor” at this responsibility and another 26% said they were “adequate”—much lower than other dimensions measured. Why, year after year, is this so, we wondered? According to director Jim Hunt, boards continue to grapple with CEO succession planning because they sincerely want to “get it right.”
Interestingly, it’s long-term succession that they lack confidence in—not short term. Fully 81% indicated that the company’s succession plan would proceed without a hitch in the event their CEO was immediately unable to perform his or her duties. While these findings might seem at odds, they more likely reflect the distinction between an emergency plan and a successful, long-term succession plan. As Rubicon’s Kasnet explains, “As a young company, we foresee little need for a directional change but are prepared for the potential of an abrupt change.”
Speed Commerce’s Gentz agrees. “I believe boards take this issue on with great vigor when they are faced with an imminent CEO change (planned or otherwise). However, when not faced with that urgency,” he explains, “boards tend to ‘theoretically’ deal with the issue, knowing it is important but not wanting to delve into it in detail until necessary. Oftentimes this is to avoid creating concern for the incumbent.”
The survey also sought to find out more about boards’ ongoing processes to plan for succession within the ranks of rising senior management. Almost 60% indicated their board has some type of formal process to assess internal candidates, leaving nearly four in 10 that do not. In another finding, 68% indicated their company’s method for benchmarking candidates against best-in-class talent is at least somewhat effective, nearly 20% admitted their efforts are not at all effective, and another 14% were unsure. On an encouraging note, nearly four-fifths of those surveyed said their board reviews the company’s CEO succession plan at least once a year, and another 14% said they do so whenever the need arises.
“By definition, internal candidates are not proven CEOs. To gain insights into whether a candidate is capable of moving into the role, boards need to embrace an assessment process that is fact based, rigorous, and forward looking. It’s also important to not lose sight of how an organization’s internal talent compares to the best-in-class talent externally,” Daum explains. “Taking a look at external talent—through research, informal or formal introductions, or a search—can provide important insight when assessing the readiness of potential successors,” she adds. “This process is critical to give the board a good sense of the relative strength of the internal candidates, as measured against the outside talent pool that would likely be considered for the role.”