Board Succession Planning for a Brighter Future

As boards look forward to the new year and the 2019 proxy season, board refreshment and board succession planning are at the forefront of all stakeholders’ minds. The push for board diversity, controversies over retirement age, board tenure, and the emergent exit of executives regarding scandal are all necessary reasons board succession planning is in the spotlight.

Transitional periods for executives and board directors are often rocky at best. Boards need to have a stringent plan in place when the expected and unexpected exits take place.

Board Succession Planning for Refreshment

Executives and directors exit the boardroom for a variety of reasons, and planning to replace a board member with an executive clone is a plan poised to fail. “Historically, Board Director Succession Planning has been relegated to a process focused on simply “replacing” a particular individual who is retiring with someone who is most like that particular individual,” says Chief Executive. This failed attempt often negates the idea that successful boards function as effective teams and fresh perspectives improve governance for the future.

It is also considered a hallmark of directors’ responsibility to engage in board succession planning. “Although there is no Securities and Exchange Commission or national exchange rule or regulation explicitly mandating that board members participate in director succession planning, a director’s general fiduciary duty of care arguably requires such planning,” reports Chapman and Cutler.

However, according to Spencer Stuart’s 2018 U.S. Board Index, boards are bringing in fresh skills, qualifications, and perspectives when board succession planning. S&P 500 companies appointed 428 new directors in 2018, 33% of which are new directors serving on their first corporate board. 17% are considered “next-gen” directors who are 50 years old or younger. Additionally, 56% of new directors are actively employed, reversing a decade-long decline of employed directors.

The first step a board can take when board succession planning is to evaluate and assess the positive attributes the retiring or exiting directors added in regards to culture and governance. Instituting a transitional period for the director and their replacement is also a favorable initiative. General Electric adopted this practice with a two year transition period and also a 15-year term limit. In addition to board succession planning, boards should also

Mandatory Retirement and Director Tenure

One of the hotly contested controversies when board succession planning is implementing mandatory retirement and director tenure. “Board refreshment also addresses issues of lengthy director tenure, board entrenchment and the interrelationship of those factions with director independence,” explains Chapman and Cutler. Although proper board turnover begins with mandatory retirement ages and limiting terms, according to Spencer Stuart, boards are making slow progress with implementing these practices into board succession planning. In 2018 the average age for independent directors is 63 years old.

As mandatory retirement ages continue to rise, 71% of boards report they do have a mandatory retirement age, a small decline from last year’s report. “Fueled by stronger corporate governance standards, overall strength in corporate performance in recent years and a possible shift in public perception of what an appropriate retirement age should be, fewer companies today have a default requirement that corporate executives should step away when they hit their mid-60s,” says The Washington Post. However, the majority of directors retire at or near their mandatory retirement age, Spencer Stuart reports.

Capping board tenure is also a practice typically used in board succession planning. But according to Spencer Stuart, few boards have director term limits promoting turnover. Only 5% of boards limit terms for non-executive directors. “Certain institutional investors are adopting more explicit requirements with regard to director tenure and director succession planning which, if not satisfied, may result in votes against long-tenured directors and/or governance committees,” says Harvard. “These investors are concerned that above-average board tenure leads to outdated skills and perspectives on the board, limits the board’s ability to bring on new directors without increasing its size, and diminishes director independence.”

Changing Boards for a Better Future

The statistics show that boards are slow to adopt change and board turnover is quite a slow process, but board succession planning should always have a place on the agenda. However, the changes that are being made regarding diversity in age, gender, and race are ground-breaking. According to Spencer Stuart’s 2018 Board Index, 40% of new directors were female, up from 36% in 2017. Minority women are also represented more heavily in 2018. Women now chair 20% of audit committees, 19% of compensation committees, and 24% of nominating/governance committees.

But because board turnover is modest overall, these changes are occurring slowly. “The aim is to appoint directors who provide diverse perspectives while replacing directors who may no longer have the requisite skills aligned with the company’s evolving strategic direction,” says the International Corporate Governance Network. “Diverse boards are less prone to ‘group think’ and more likely to embrace new ways of thinking to meet future company threats and opportunities.” Board succession planning starts with Creating, implementing, and backing strong and sound procedures that help these statistics rise for the future.

There is no one-size-fits-all approach to board succession planning. Boards should take into consideration the unique characteristics of their company including strategy,  risk management, and stakeholders needs. Implementing solid board succession planning processes ensure that the board will generate long-term value for new directors and ultimate success for the organization.