Written by Lawrence Zammit, 17 February 2014
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Directors often spend a great deal of time discussing management succession. There is always the fear as to what will happen next if the CEO or another key member of senior decides to move to another job. They ask if they can be replaced within a short time or if there is another person in the organisation who can step into their shoes.
However they very rarely discuss succession at Board level. Although directors are appointed on a yearly basis by the shareholders, they may, at times, think of themselves, as eternal, as if one is not expected to retire from the post of director. Therefore the issue of succession is very rarely towards the top of the priority list.
The point is that succession planning is not an urgent matter, unless a director steps down unexpectedly; but it is certainly an important matter which directors should concern themselves about on a regular basis.
The next pitfall that directors, at times, fall into once they start discussing succession planning, is that they very often end up discussing replacement planning – that is how are they going to replace the director who is about to retire.
This is something totally different to succession planning, which requires answering to a number of quite specific questions. And the quest for a director needs to be guided by the answers to those questions.
What should be the size of the Board? There is no one size fits all solution. The size of the Board depends on the company’s requirements. Therefore, when a director is about to retire, one should not take it for granted that the person simply needs to be replaced. It may be that the retiring director does not need replacement or that the size of the Board needs to be increased in the circumstances.
What should the focus be? One needs to remember that the core objective of a Board of Directors is to enhance shareholder value and it achieves this objective by setting the right strategy. It is not the job of the Directors (unless they are executive directors with specific executive functions) to manage. So incoming directors need to be assessed by their ability to contribute to strategy.
What should the selection criteria be? Every Board of Directors has its physiognomy and needs to ensure that it has the appropriate competencies to serve the company well at that moment in time and in the foreseeable future. This is why a Board cannot resort to replacement planning, as the retiring director may have a set of competences that are already available on the Board or may not be so relevant in the circumstances. Therefore the selection criteria should be based on the competencies that are required or are expected to be required in the future by the company given the market it operates in.
How long should the time frame for succession be? All too often, there is a director who is retiring and is replaced by another person. Very rarely do the two directors sit together on the Board at the same time that is there is a time when they overlap. Moreover the search for the new director very rarely starts well in advance to allow enough time for a comprehensive search for the right person and a proper assessment of the candidates. If one accepts that one requires a thorough selection process and an overlap between the retiring director and the appointment of the incoming director, then the succession process might well take from one to two years.
A Board of Directors has a life and personality of its own within the structure of the whole organisation. As such it needs to go through a process of renewal, as much as the line departments in an organisation need to go through a process of renewal. This is why succession planning at Board level needs to be given its due importance, as the risk is that what is a well functioning Board may well become a dysfunctional one.