Features
9 Feb 2016 11:04am

In the pipeline

Ensuring there are people at every level being developed to take a seat on the board is just one of the many steps companies should be taking to ensure best practice in succession planning, says David Adams

Succession planning for the board is difficult, in part because of the nature of business today, with business models forever in flux and a more transient workforce than was once the case. Nonetheless, if companies make the necessary preparations, they can gain significant business benefits. As the authors of a 2013 Aon white paper on Best in Class Succession Management put it: “Best in class organisations use succession management as a strategic business-planning tool that... develops a pool of highly talented individuals in order to meet the organisation’s overarching long-term strategy.”

In October 2015 the Financial Reporting Council (FRC) published a discussion paper, UK Board Succession Planning, asking readers to contribute views on board succession for executives and non-executives. The paper examines issues including the importance of diversity on the board; and the roles played in succession planning by the nomination committee, board evaluation and investors. It looks at how companies should go about creating internal and external “pipelines” through which talented individuals can be tracked and prepared to join the board in future.

The hallmark of a well-run company is how well they manage succession. It shows they're thinking about the future

Philip Stiles

So what are the key elements of best practice in creating this type of pipeline for board succession? When considering the importance of the Nomination Committee, the paper drew on statistics from Grant Thornton’s 2014 Corporate Governance Review. This found that nomination committees, which should play a key role in board succession, tend to meet less frequently than other committees and that the quality of disclosures from the nomination committees was often inferior to those provided by other committees.

This theme is also cited by Simon Lowe, partner at Grant Thornton, leader of the firm’s large corporate practice and chairman of the Grant Thornton Governance Institute. “The nomination committee should have a growing involvement, not only in finding the right director to take on a specific role, but also in long-term strategic planning,” he says. “The committee should be challenging the executive team and the board about the skills that will be needed there in the future.”

“For best practice, everything starts with strategy,” says Philip Stiles, senior lecturer in corporate governance at Cambridge Judge Business School. “What is the company trying to achieve? Often companies choose a leader for today’s company, or yesterday’s company, not the leader they need for five years’ time. Often that is about a lack of strategic clarity.”

“You need to understand where your business is going and what your requirements will be for the board,” says Catherine Woods, corporate governance policy advisor at the FRC. “You should review your board and see what skillsets might be missing.” The process of board evaluation can feed into this process, because it is important to be aware of the possibility that current board members with existing skills may retire in the short or medium term.

Talented individuals within lower tiers of the company should be tracked and supported when necessary to minimise “leakage” within the pipeline, suggests Mala Shah-Coulon, executive director, corporate governance at EY. For example, support should be provided to high potential individuals (often women in this case) if they reach a point in their careers when family pressures make them consider leaving the company.
Identification of these individuals should be based on assessments of performance and potential, using some form of matrix to assess them within those two dimensions, says Stiles, although of course, this means much depends on the frequency and effectiveness of performance and potential measurement.

“Performance is relatively easy to measure and would usually be measured at least half-yearly, possibly quarterly and in some jobs more frequently, but potential is harder to assess,” she says. “Normally the rule of thumb is, could that person take on a role two levels above their current role? You might look at someone’s potential and ask what other people think of that person, possibly informally.”

But organisations must also try to ensure they are assessing potential effectively – not being fooled into over-rating the highly assertive, or confident, for example, or underestimating quieter individuals.

One of the most important aspects of managing the pipeline is ensuring that leakage does not occur because an individual perceives limited opportunities for themselves.

“Does the company provide enough opportunities for individuals to move up and develop and grow, within their existing roles, or by moving laterally?” asks Stiles. This is likely to be easier within the largest companies – smaller organisations may need to use more imagination to keep potential high flyers interested.

The 2013 Aon white paper stressed the virtues of transparency in relation to this aspect of talent management. “Where old... systems were characterised by secrecy... many current best-in-class organisations make their succession management process as transparent as possible,” wrote its authors, on the grounds that this “encourages clarity and integrity, and minimises politics, which can result in better retention of top performers”.

These high flyers should also be given exposure to the boardroom environment at an early stage, says Shah-Coulon. They might be invited to present to the board, for example. It may also be useful to ask current board members to act as mentors.

“People need those training opportunities,” she says. “Otherwise, when they arrive on the board everyone expects you to know what to do – but you don’t. You need exposure to that environment in advance.”

Individuals being tracked through the pipeline will also benefit from broadened experience, through working as non-executives for other organisations, for example. As paragons of how this can work, Lowe cites Grant Thornton’s own Advanced Manager Programme and BP’s Future Leaders Programme.

Diversity is also an important element in creating and managing the succession pipeline, because it can be such an effective defence against groupthink. “You want a gender mix, because women and men think differently,” says Shah-Coulon. “But it’s about diversity in its broadest sense, in background, skills and experience.” Diversity of approach is also important, she points out – you wouldn’t want every board member to take a purely analytical approach, for example: “You want some visionaries as well.”

It is also necessary to plan for unexpected succession – if someone on the board leaves suddenly and without warning. Stiles talks about the value of “bench strength” – of having more than one candidate ready to step into vacancies if they appear. There is also a need for continuity. “The knowledge you gain at executive level and within the level below, that isn’t something you pick up overnight,” says Lowe.

One common pitfall companies must seek to avoid is senior managers bypassing the succession process and simply picking their own favourites for advancement. “That then undermines the whole process,” says Stiles. “If people don’t think the process is working they won’t take it seriously and the whole thing starts to unravel.”

Then there is also the important question of when to hire talent from outside the business. Nick Parker, vice-president of ICAEW, says the Institute’s own policy of advertising senior positions externally while also encouraging internal candidates to apply can be a good solution. “That then gives you the ability to compare and contrast,” he explains.

Ultimately, says Lowe, an effective talent pipeline depends above all on input from three sources: “Strategy, the nomination committee, and the people and culture element of the company. Each has an impact on the pipeline,” he explains. “It’s the three together that lead to best practice: clarity around strategy and greater involvement of the nomination committee around what the business needs now and will need in future.”

Which companies are particularly good at creating succession pipelines? It is difficult to say, because our primary source of evidence, without investigating each company in depth, is annual reports, which may not always provide a complete and accurate picture in this respect.

However, there are a few names that seem to come up again and again when succession planning experts discuss this subject, among them IBM, Barclays (despite certain hiccups at the very top of the company), Standard Chartered, Marks & Spencer and BP.

Shah-Coulon points to Experian as an example of a company that is very good at explaining what individual board members bring to the board; and that also appears to have put some strong emergency succession plans in place. “All of that is good evidence that they have good processes in place to manage and track talented people,” she says.

The Experian Annual Report and the Marks & Spencer Annual Report (for example) also feature full sections on the work of the nomination committee in general and on succession planning in particular, introduced by the committee’s chair – evidence of the extent to which the committee is valued within these companies.

Arguably, IBM provides a good example of best practice when it comes to managing the most crucial and most difficult succession of all, that of the CEO. The rise of Ginni Rometty to take over from Sam Palmisano first as CEO (in 2011) then also as chairman of the company (in 2012), is widely regarded as a highly successful internal appointment – Rometty has worked for the company since 1981.

Such a smooth transition is remarkable, says Stiles. “You could count on the fingers of one hand recent examples of really successful chief executive successions,” he says.

Companies are most likely to appoint a new CEO from inside the company only if all seems to be going well, he continues: “There are lots of exceptions, but there’s something in that, with continuity of culture and signalling that you’re confident in the talent you have inside the business.”
When it comes to the internal succession pipeline, one very important aspect of the transition to a new CEO is how you manage the people who don’t get the top job. “It’s almost inevitable that there will be some fallout,” says Stiles. “If four or five people are battling against each other only one will succeed and the others will have to think about their futures. It’s difficult to pull off, whichever way you play it. That’s probably why most companies don’t get it right. It’s something you can plan a lot for, but in our experience not many people stick to the plan.”

He and colleagues at Cambridge Judge Business School will be doing further research into chief executive succession in 2016.

There may well be value in seeking external input when it comes to deciding on very senior appointments, certainly from major investors and possibly (in some cases) from an industry regulator.

Stiles points to the unfortunate tenure of Paul Flowers at the Co-op Bank as an example of a case where more pressure from a regulator could have highlighted an inappropriate appointment and ultimately produced a better outcome.

“There are examples where the regulator is the last line of defence, for a good reason – to protect the public,” he says.

But although some industry regulators – as in the financial sector – do now sometimes get more actively involved in the appointment of new directors, every one of the experts interviewed for this article agreed that for the most part this is a matter for the board, or for major investors.

Indeed, there does seem to be a growing interest in this topic among investors, with more information now being demanded from companies regarding succession strategy. That is completely reasonable and investors should be encouraged to seek information on and challenge the board over its succession process, says Woods: “If you could explain how you review your board’s skillset and what you do in terms of recruitment to the board that would be very helpful. You don’t need to show them all of the details – and it would be very difficult to do so. You just need to show that you have a good process in place.”

Stiles reckons “the hallmark of a well-run company is how well they manage succession. It shows they’re thinking about the future.” Clearly, every board should be doing that, to ensure more success and prosperity will follow for employees and investors, whoever happens to be sitting around the boardroom table.

David Adams

 

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