Governance, Compliance, & Legal Matters

Written by Carol Coughlin. Posted in Business Leadership, Financial Strategy, Uncategorized

The Governance Committee’s Role in Board Succession Planning,

Board Engagement and New Best Practices

 

There are volumes of articles focused on the succession of key management. Historically, however, not much has been written about board succession. This is not surprising, considering in the not-so-distant past, board directors were considered not unlike Supreme Court justices – on the board for life.

But this is not the case anymore and that is why board succession is currently one of the most relevant topics being debated in the boardroom.

Today’s boards understand the need for a board succession plan, and its members and advisors are raising some important and even controversial questions:

  • Should we have age limits? If yes, what should those limits be?
  • What skill sets do we need on the board right now and for the organization’s long-term effectiveness?
  • Do we have appropriate diversity (not only in terms of gender and race, but in thought)? And does that diversity represent the demographics of the company’s customers?

 

From these three questions alone you can see how tightly the board succession conversation is tied to overall board strengthening, and it’s making today a very interesting time to be in the governance arena.

So, let’s dive into the role governance as it’s related to succession planning and all the other governance responsibilities and elements that go into building a strong board.

 

What’s the role and responsibilities of the governance committee?

Exploring the types of questions listed above and, ultimately, designing the board’s succession plan, falls squarely under the jurisdiction of the governance committee – and the urgency to determine the right answers and create a strong plan is only increasing.

According to a recent survey by the National Association of Corporate Directors, the rate of director turnover on public-company boards has been on the rise over the past several years. Interestingly, one of root causes may be the investors.

Investors across the spectrum have expressed a keen interest in board composition and director skill sets. This means that governance committees and directors need to view board succession planning through the lens of an activist investor in order to ensure a board composition that’s capable of providing the oversight and strategic insights the company needs now and into the future.

To get there, every governance committee should have a charter that addresses the scope of the committee, its function and responsibilities, and this should be reviewed formally every year at a minimum. The governance committee should also ensure the charters for all committees are reviewed at least annually. Additionally, while only public companies require governance committees to have independent directors, it is a best practice for private companies as well, using independent directors as voting members of its board’s governance practice.

Another very standard and important function of the governance committee is to oversee certain governing policies, including conflict of interest and whistleblower policies.

Some of the ways the governance committee can fulfill these legal and ethical obligations is by being very active and setting the tone for strong and candid communication among the directors, as well as by setting expectations of each director.

I’ve found that defining expectations of directors (which may include mandatory attendance at meetings, continuing education and an investment in the company) results in higher director engagement, meaningful meetings and good governance.

And, of course, good governance leads to a higher level of ethics and compliance.

 

How is the succession plan managed?

The governance committee often plays a dual role with the nominating committee and is pivotal during succession planning in the boardroom. Good governance calls for a strong slate of directors, as well as planning for talent identification and continuous evaluation of the composition of the board and its strengths and weaknesses.

Because the focus of companies is on the future and not the past, there is always a need for fresh talent and perspectives.

Here’s an apt example of just how critical new thinking is:

When I first met one of the private companies I’ve work with on board governance, the expectations of the board were… frankly, not very high.

Over half of the board members had 20+ years on the board. Clearly, there were no age or term limits. In fact, the chair had been in place for a number of years without contest, and directors had a definite case of entitlement syndrome – holding the expectation that they would be on the board either until they died or were no longer able to function.

In the minds of the directors, being on the board was their “choice” when those decisions should have been based on the needs of the company. There were also no continuing education requirements and no discussion of what the company needed from the board.

 

Fast forward to today:

The company has only one director, other than the CEO, with more than 10 years on the board. Most importantly, this highly tenured director is now just as focused on the future as the newer directors.

The board is also very engaged and dynamic, and because members are asking very relevant and appropriate questions, they have raised the bar for the company’s performance. Additionally, the management team has stepped up thanks to necessary changes made in leadership on both the board and within company.

What happened?

 

We entered on the journey of a much needed board refresh using good governance concepts and practices, and the company and board are now experiencing the rewards.

Creating an environment for candid conversations, setting clear expectations, evaluating continually and increasing engagement all played a part in taking the board and the company where they needed to be.  However, this process doesn’t happen overnight.

 

How can the governance committee increase board engagement?

The governance committee, along with the board chair, need to establish a culture that encourages an engaged board – a board in which members participate in active and diverse discussions and where directors feel comfortable expressing their opinions.

Interestingly, I have found that using executive sessions, as a matter of course at every meeting (rather than only in a crisis), has led to very candid conversations.

One of the boards on which I serve is relatively new – just over a year old. You can imagine the challenge of eight new directors trying to get to know each other and a complex organization – all at the same time. A few months ago, we started having executive sessions with non-executive directors. This has been a great way for the directors to get to know each other better, develop good chemistry and has helped to set the agenda for future meetings and topics of discussion that need to be addressed by the board.

On another board, we started holding executive sessions at the end of each meeting. We were able to hear the directors’ opinions about how the meeting went, uncover if there were any issues we needed to dive into and also get coordinated feedback for the CEO.

Another way to develop a more engaged board (and another key function of the governance committee) is to regularly evaluate the performance of directors and the board.

In my experience, the best way to do this is through anonymous surveys that allow each director to evaluate his or her own performance, that of the other directors and of the

board overall. The governance committee chair (and/or the board chair) is responsible for giving feedback to the directors.

Of course, sticky issues can arise and need to be discussed, and the governance committee may not feel comfortable managing these processes. In those cases, bringing in outside support can make all the difference in ensuring that difficult conversations don’t cause communication to shut down or engagement to stall.

 

What are the newest best practices and trends related to governance?

Many best practices and trends are being driven by the need for better governance, and others are a direct result of activist investor activity. While I’ve mentioned a few best practices and trends in the sections above, here is a deeper look:

 

360 Evaluations

360-degree evaluations are becoming more prevalent and some boards are also including key non-board executives in evaluating the board. This practice helps directors grow more quickly because it’s tough to disregard a call for personal change when the same feedback is coming from more than one person.

The challenge, of course, is taking a board from no feedback to 360 feedback.

Even though most directors have measured other people’s performance throughout their careers, measuring their own performance can be very touchy during the first time through. Making board evaluations anonymous can ease the pain, as well as encourage more candid feedback on each director.

There are some situations that are “big enough” to warrant bringing in an external governance firm to run the evaluation and feedback process. For example, if significant board changes are needed or if there are difficult situations with longstanding directors or chairs, an outsider can be a very powerful force for ensuring honest communication and wise solutions.

 

Regular Executive Sessions

The regular use of executive sessions that I mentioned earlier is also increasing and beyond the benefits I’ve already stated, incorporating this practice is also a good way to ensure that critical discussions don’t raise red flags. Since the regular executive sessions will be seen as a standard part of the process – simply a matter of course – a significant issue with a CEO, for example, won’t set off alarms. After all, if a board only holds executive sessions when there is a management issue, management will definitely perceive executive sessions as a cause for concern.

There is also a trend in governance to require continued education for directors. For example, one board I work with publishes education opportunities and tracks director continuing education hours. The governance committee then reviews each director’s credits at every governance meeting.

 

Pro-active Succession Planning

Often succession planning is conducted only in an emergency situation or when a board member is retiring. This is really not succession planning; it’s a contingency plan.

Governance committees not only need to develop a concrete succession plan, but make succession planning activities part of their ongoing business.

For instance, the governance committee should continuously review the needs of the company, determine which directors meet those needs and if there are any gaps. To do this well, governance committees need to keep an eye on trends in the business world and in the economic environment and plan board composition accordingly.

Another proactive planning tip includes Cybersecurity. This is a great example because Cybersecurity is currently one of those issues that keeps directors up at night. A governance committee needs to make sure there’s specific cybersecurity expertise on the board (which doesn’t mean someone who worked at IBM 25 years ago) is practicing proactive succession planning.

 

Strength through Diversity

The case for board diversity, including gender, race and thought, is so well documented that I won’t elaborate on how the evidence of building a diverse board is the best practice and clear trend which makes boards and companies stronger.

Yet what I’ve heard from many sources is that boards believe that finding strong, diverse candidates, and therefore creating a diverse board, is difficult – and diverse candidates believe its equally difficult to secure board seats.

Fortunately, there are many groups designed to assist candidates in finding opportunities, which means that companies and candidates simply need to spread their nets a little wider. I encourage candidates to work with groups like Women in the Boardroom, Women Corporate Directors, NACD and ExecRank, just to name a few, and I encourage companies seeking diversity to contact those groups.

Also, boards are often built through networking (not through the use of recruiters), so it’s important for both directors and candidates to make themselves visible in the community and to build and nurture relationships.

 

Thinking Like an Investor

As I indicated earlier, there is much talk these days about the prevalence of activist investors. In fact, one of the board leadership conferences I attended recently had a breakout session in which directors were challenged to think like an activist investor.

The good news is that most directors, myself included, are also investors in the companies we govern and our goals are aligned with those of activists already. We want the companies we serve to perform well financially and deliver results, and we need to hold management accountable for achieving that higher performance.

 

Finally, what is the role of governance when it comes to existing and emerging best practices and trends?

 

It is the role of the governance committee to ensure that everything required for a strong board and a strong company (all the practices and responsibilities discussed in this article and more) is in place and effective.

Which means that the agenda for today’s governance committees is both challenging and dynamic.

It is an exciting time to be working on board governance and I find the richness and intensity of the work highly fulfilling. In many ways, governance committees and consultants are in the front lines, setting the stage for a new era for boards. An era that demands higher levels of engagement, pro-activity and commitment than ever before.

Most importantly, it’s an era in which every individual is being tasked with bringing real value to the table in service creating stronger companies, stronger communities and a stronger economy overall.

Good governance is the lynchpin for the changes that are occurring – and the changes yet to come.

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