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Succession planning

A key board responsibility

Home / Hermes EOS Blog / Succession planning – A key board responsibility

In governance, we have long acknowledged that the most important responsibility of the board is to promote and protect the interests of the company’s shareholders. To do that, the board’s primary management approach is to hold the executive team, especially the CEO, accountable for the delivery of the company strategy as developed by the board and prudent risk management. A suitable board composition and the competencies of audit, remuneration and nomination committees are vital to the ability of the board to do this.

Lack of disclosure
In this context, it is surprising that succession planning is scarcely used as a management tool by the board, given the importance of the subject and possible repercussions on power dynamics and effective decision-making within an organisation. According to a study by Stanford University, a majority of companies do not have honest and open discussions about executive performance, nor do they allocate sufficient time to the process of identifying and grooming successors. This is echoed by research which found that 24% of Russell 3000 companies provided no disclosure on succession planning during the two years prior to a change in their CEO change, despite the 2009 Proxy Disclosure Enhancements by the US Securities and Exchange Commission, which require an increase in disclosure on succession planning beyond boilerplate. Even when disclosure was provided, it did not include some critical information sought by investors, for example who is responsible for succession planning. In the UK, the Financial Reporting Council noted that even the regularity, purpose and effectiveness of the meetings of the nomination committee are not always reported, particularly with regard to succession planning.

These alarming findings suggest that many companies do not have a structured succession planning process in place. As engagement professionals, we want to see a process in place which formally assigns roles to key stakeholders of the succession planning process, namely the board of directors, senior management team and human resources department. The company should articulate how it identifies situations when professional help is needed and how it interacts with external executive search specialists. In other words, we need to see transparency and accountability at each stage of the succession planning process.

Measuring performance
Another issue that requires investor attention is linking succession planning to executive remuneration. We rarely come across key performance indicators of an executive that measure his or her effectiveness in grooming and mentoring direct reports. Few, if any, organisational metrics are in place to determine how well a company is managing succession overall. In our opinion, even if internal talent management programmes are structured to support succession, the continuity and nature of these programmes can significantly change under different senior management leadership, affecting the confidence of internal talents. This has a negative impact on culture overall.

Laggards
A recently published report by an independent research firm states that only half of the world’s listed companies have succession plans. They are most prevalent in the UK, where 39% of researched companies have plans in place, and occur the least in Taiwan and Japan, where less than 2% of researched companies have adopted and disclosed this practice. Culture and company traditions may have contributed to the results. Some companies may also face family transition difficulties – 86% of listed companies in Taiwan are family-controlled, with 64% transitioning from first to second generations[1]. Second and third generations of family businesses may also prefer to start their own businesses in completely different sectors. In recent years, many have developed a strong interest in the entrepreneurship space. Further research and investigations are required to understand why some companies are laggards in succession planning, but, regardless of the causes, inaction is not an option.

In addition to the issues highlighted in the study, investors should also pay attention to the following:

  • Understand if a board committee or director has responsibility for overseeing CEO succession planning
  • Even if a committee or board director has specific responsibility for overseeing CEO succession planning, other directors should also be able to demonstrate their knowledge and viewpoints of the succession issue to show that thoughtful discussions involve all members of the board – board leadership is for the whole board; and
  • Talent management programmes and succession planning should demonstrate connectivity, coherence and coordination.

Few events in the life of an organisation are as important as a change in leadership. It should be taken seriously and seen as a key responsibility of the board.

 

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[1] Taiwan Institute of Directors (2015) Family Governance Review October 2015 No. 4: 20-23.

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    Christine Chow Dr Christine Chow is responsible for the financial services, technology and extractive sectors in Asia ex-Japan. She has 19 years of experience in portfolio management, research and investment consulting. Christine's PhD thesis on shareholder engagement for responsible investment was short-listed for a UN award in Sweden for industry relevance and academic excellence. She is an adjunct associate professor in the Department of Finance at the Hong Kong University of Science and Technology. She is a governor of the London School of Economics and a member of the university’s investment committee. She was also a member of the greater China committee of the Hong Kong Retirement Funds Association between 2014-2016. Christine has worked at a number of multinational corporations such as Merrill Lynch, Schroders and Hewitt. In the 1990s, she was responsible for establishing strategic partnerships in fund management for the Schroders Group, especially in Mainland China. Christine is a graduate of the London School of Economics and the University of Melbourne. She also completed an executive education course on financial engineering at Stanford University.
    Read all articles by Christine Chow

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