July 12, 2022 – In the past, boards treated board succession tactically, appointing the most eminent available candidate or someone who could meet an immediate need. Today, however, both external and internal pressures are compelling directors to adopt a longer-term, strategic view of the composition and evolution of their boards, says a new report from Egon Zehnder. But taking that long-term view is only the first step. Boards must also adopt practices that make the vision a reality.
According to Egon Zehnder, in more than two decades of heightened attention to good corporate governance, widespread agreement has emerged about how companies can achieve high-level board composition and succession:
- Assess current and future board requirements in terms of the operational and strategic direction of the company. Factor in the evolving competitive environment within the industry as well as large-scale changes such as globalization, technological transformation, and sustainability.
- Add in dynamics related to social movements and global health crises which have come center stage in the past two years.
- Then make sure the board is composed of directors who offer the right mix of skills, experiences, and perspectives to provide oversight and advise the CEO under those conditions.
“But when this ideal collides with reality, big-picture strategic thinking can take a backseat to immediate pragmatism,” the Egon Zehnder report said. “To be sure, most companies take a more rigorous approach to identifying and nominating director candidates than in the past, reaching beyond their personal networks to screen a larger candidate pool against an objective profile of the board and the company’s strategic needs. But even with these improvements, most companies do not approach director succession planning with the same long-term view that they take with CEO succession. It can still be too easy to view director succession as filling vacancies rather than constructing a board.”
Pressures and Opportunities to be Strategic
Today, however, several powerful currents have come together to give new urgency to issues of board composition and strategic board succession planning. Egon Zehnder points to the most prominent developments:
Fierce competition for the best director talent. Certain skills and experiences are in high demand, such as directors who have firsthand experience helping to oversee or manage technological transformation within an organization. “This dynamic is even more present for boards seeking to appoint directors from underrepresented minority groups, who are often fielding multiple approaches each week for roles with attractive boards,” said the report. “The sensitivity to overboarding and the wariness with which many sitting executives—CEOs in particular—regard the extra workload from sitting on an outside board means stiff competition for the most qualified directors.”
A world in flux — and winner-take-all rewards for those who navigate it best. Businesses today have to find their way through a time of unprecedented change and disruption globally. “New technologies have lowered barriers to entry not just in knowledge-intensive industries, but in more tangible ones, like manufacturing,” the Egon Zehnder report said. “However, the disruptors of five years ago are now being disrupted, and some are struggling to adapt to the realities of operating as a more mature organization after having achieved ‘overnight’ success and growth in their earliest days. The need for agility and visionary leadership has only increased as the COVID-19 pandemic forces businesses to adjust to new realities across supply chain, manufacturing, and workforce dynamics, and as broad social and political movements force leaders to broaden their view of the stakeholders to whom they are accountable.”
Egon Zehnder notes that the right board can play a critical role in advising a management team undergoing such transitions. It is critical for boards to consider the appropriate balance of forward-looking contributors who have played the role of “disruptor” successfully vs. seasoned, steady hands who have successfully led organizations through cycles of growth, contraction, and disruption.
A persistent “global capability gap.” The opportunities for growth in developing markets overseas remains a key strategic focus for many U.S. companies, though the number that are able to successfully gain footholds in these markets is more limited, according to the Egon Zehnder report. “The pace at which the realities of operating in developing markets shift can be so rapid that insight from just a handful of years ago is no longer relevant today,” the study said. “This disparity between a company’s global footprint and the ability of its board to guide and advise leaders on global matters creates a global capability gap. Not surprisingly, companies with global expertise in the boardroom have a better understanding of the revenue volatility associated with global expansion and are better able to exploit the upside and minimize the downside of operating overseas.” However, consider whether the board as a governing body is best suited to advise on this topic through the recruitment of an individual with recent, on-the-ground operating experience, or instead, by a broader leader who oversaw a business that successfully grew in markets of interest.
A doubling down on diversity and inclusion. Whether viewed as a business imperative, an ethical responsibility, or a fiduciary requirement, Egon Zehnder notes that diversity and inclusion has moved to the top of the boardroom agenda. “There is increasing pressure from various stakeholder constituents to have broad representation at the highest levels of business leadership and governance,” the firm said. “The stakeholders include large investors, proxy advisors, state and local governments, exchanges, underwriters, and others. The definition of diversity continues to expand to include other historically underrepresented voices, including leaders from the LGBTQ+, AAPI, and Indigenous communities.
A report from Ellig Group notes that we are still seeing incremental change in boardrooms rather than the kind of dramatic shifts many have called for. The search firm lays out some of the problems companies face when trying to diversify their boards and offers solutions to fix them.
What previously may have been a conversation about the “right thing to do” is now a conversation about what boards must do. A diverse board, however, extends beyond categories of race, ethnicity, and gender to include the broader notion of diversity of expertise and perspective. “This may manifest in appointment of individuals from less traditional backgrounds, including senior functional executives, or thought leaders from non-business realms who can help organizations navigate complexities of the current macroeconomic environment,” the Egon Zehnder report said. “Its business value derives from the fact that diverse boards (and management teams) have a wider range of skills and competencies, industry and functional expertise, and cultural perspectives, and bring a greater degree of global business experience. This breadth of attributes is a wellspring of innovation and serves as an invaluable check and balance in group decision-making. But this more sophisticated understanding of effective board composition requires an articulated strategy and a much higher degree of coordination and planning for director succession.”
Greater regulatory scrutiny of board composition as a corporate governance function. While investors, regulators, and other observers historically focused attention on corporate governance issues such as director independence and succession, Egon Zehnder notes that board composition has gained the attention of key stakeholders as well. Investors now consider board composition and tenure to be a litmus test for a company’s governance capabilities.
Best Practices in Board Succession Planning
The Egon Zehnder report says that the most forward-looking boards are using these developments as impetus for a holistic reexamination of their board succession planning process. From the firm’s work with these boards, they have distilled several best practices, the most critical of which include the following:
Step up the rigor of board evaluation. While not a new concept, annual board evaluations continue to be an important part of good governance hygiene. Although historically helpful in assessing the general health of the board’s processes, culture, and the capability of the overall board, they often lack the thoroughness, specificity and transparency now expected by stakeholders. In addition, if boards self-assess, the evaluations often lack true objectivity. Egon Zehnder says it see a trend in recent years toward broader disclosure of board evaluation practices, along with more frequent evaluation of individual directors, and leveraging third-party facilitators to provide an objective view of the board’s performance against best practice from the broader market.
Define the role spec via a more dynamic board matrix. Today’s board matrix is often a static summary, used tactically. Instead, insights into the future corporate strategy plus director retirements and committee rotations should be the basis for developing a more purposeful matrix that functions as a forward-looking tool to analyze anticipated multi-year vacancies and capability gaps. Egon Zehnder says that this should then be translated into a spec that comprehensively articulates the dynamics of both near and longer- term needs.
Marry multi-year strategy with opportunity. Forward-looking perspective keeps the focus where it belongs: on overall composition and evolving needs, rather than on a particular opening. In cases where several vacancies may be looming within a few years of each other, Egon Zehnder says that it can foster a marriage of strategy and opportunity. For example, instead of filling these needs in a prescribed order, the board would seek the best candidate available at the time to fill one of the future vacancies. A second vacancy would be filled by the best candidate available at the time against remaining areas of need, and so on.
Maintain an “evergreen” picture of the candidate pool and cultivate potential candidates far in advance. Having established a clear picture of the skills and expertise the board will need and when it will need them, for future needs the board should begin to develop relationships with potential candidates well in advance. Egon Zehnder notes that this widens the talent pool to include high potential candidates who are not quite ready, or executives who cannot serve now but who will be available in the future. This puts the board ahead of the game when looking for boardroom talent, with an equally important side benefit being the board’s ability to use this time to get to know potential candidates well before they join, which helps with onboarding and acclimation of new directors.
Establish a process with clear roles and responsibilities. Taking that multi-year view requires boards to create a structured, ongoing process for succession, instead of an ad hoc approach every time a vacancy looms. Egon Zehnder says that the nominating committee is the natural home of the process, but the full board should also take part in regular discussions about the current and developing director pipeline.
Pair strategic succession planning with a thoughtful and robust onboarding program. A thorough and forward-looking approach to onboarding and integrating new director hires can help ensure the board realizes the benefits from its strategic succession planning sooner, rather than later. Egon Zehnder notes that this is particularly helpful in contexts when adding first-time directors, or leaders with non-traditional backgrounds to a board, though all new directors will benefit from understanding a board’s processes, culture, aspirations, and expectations.
Taking a strategic view of board succession planning is a “must have” attribute in a company’s corporate governance toolbox. “The historical approach of filling seats as they become available has given way to a more deliberate, longer-term perspective on board composition,” said Egon Zehnder. “Embracing this challenge provides boards with a starting point into giving the matter the sustained, focused attention that it needs—and to reap the considerable benefits that come from having the right directors around the boardroom table.”
Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Managing Editor; and Stephen Sawicki, Managing Editor – Hunt Scanlon Media