Board Chair Succession Planning
Special Report In Partnership with Patrick O’Callaghan and Associates
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SPECIAL REPORT BOARD CHAIR SUCCESSION PLANNING
Introduction With 83%1 of major Canadian boards now separating the roles of chair and CEO, there has been an increased focus on board leadership as one of the most important factors determining board effectiveness. While undertaking hundreds of board and director assessments and searches over the past fifteen years, Patrick O’Callaghan and Associates and Korn/Ferry International have consistently found that the boards operating most effectively have exceptional board chair leadership. Conversely, when a board is struggling, poor board leadership is inevitably one of the problems. The board chair has an enormous impact on board performance and exercises significant discretionary influence over both the board and management. The objective of this survey was to better understand how Canadian boards plan for the succession of the board chair. Korn/Ferry International and Patrick O’Callaghan and Associates surveyed 185 directors across Canada during the spring and summer of 2009 soliciting their comments and views regarding board chair succession planning. 1
Corporate Board Governance in Canada, A Review of 2009, Korn/Ferry International in Partnership with Patrick O’Callaghan and Associates.
Highlights of Survey • Ninety-seven percent of the directors surveyed believe that board leadership is either important or very important to the effectiveness of the board. •
Directors indicated that the four most important responsibilities of the board chair are ensuring the board has a strategic focus, helping set the tone and culture of the organization, managing relationships and ensuring that the Board is operating effectively.
•
Directors indicated that the key skills and experience required by a modern chair include previous significant leadership experience, outstanding communication skills, an understanding of the relevant business and industry, and the time to devote to undertaking the broad range of board chair responsibilities in today’s environment.
• Just over half of all the directors interviewed indicated that there was no board chair succession planning process in place within their organization. • When directors were asked if board chair succession planning received the appropriate amount of attention within their organization forty-nine percent of directors said that either it did not or they were not sure. • Directors identified a number of important principles that should be taken into consideration when planning a board chair succession process.
Director Respondents by Company Size Asset Size
Percentage
Less than $500 million (Small)
12%
$500 million to $5 billion (Mid-Size)
50%
More than $5 billion (Large)
38%
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The Importance of a Board Chair’s Leadership to Overall Board Effectiveness How Important? Directors overwhelmingly believe that the board chair’s leadership is critical to the board’s effectiveness. Ninety-seven percent of the directors surveyed believe that board leadership is either important or very important to the effectiveness of the board. Eighty-three percent believe it is very important. This result was consistent across all sizes of companies and industries.
Importance of Board Chair’s Leadership to Overall Board Effectiveness
Small
Mid-Size
Large
ALL
Very Important
82%
82%
85%
83%
Important
18%
14%
14%
14%
Somewhat Important
0
4%
1%
3%
Not Important
0
0
0
0
Directors emphasized that the board chair sets the tone within the board and more broadly the tone between management and the board. The following comment captures the sentiment expressed by many of the directors who were interviewed: “The board chair sets the tone for the whole board and indirectly for the management team; he/she has the responsibility of making sure all board members are heard on topics of importance to the corporation; the chair’s leadership and management of meetings is critical to ensure that issues are fully vetted and decision making reflects the input of the whole board in a timely fashion.” The effectiveness of a board chair is determined by his/her ability to understand and work effectively with a group of colleagues who share responsibility for board effectiveness. “Boards are a collegium of equals. There is no management hierarchy. The Board Chair, therefore, is a leader of equals. Boards aren’t about individual achievement.”
97
Ninety-seven percent of the directors surveyed believe that board leadership is either important or very important to the effectiveness of the board.
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%
Board Chair Responsibilities We asked directors to identify what they believed to be the three or four most important functions of the board chair. While there was a wide range of responses most could be grouped into the following four categories. Strategic Focus Boards are increasingly involved in working with management on strategy and risk assessment. Directors indicated that the board chair’s ability to focus the board on the organization’s strategic performance is key to ensure that the board is operating effectively and at the appropriate level. From a practical point of view the board chair implements a strategic focus by working with management and the board in setting and managing the agenda for board meetings and developing the board’s priorities. “The board chair must understand the challenges and risks facing the entity and focus board time on those issues.” “Work with the directors and management to set the agenda for the board; engage the CEO and top management leaders in identifying, at the end of one year, the top risks and opportunities facing the corporation in the subsequent year, and then to decide which are priority issues, which will constitute the board’s core agenda and be the subject of in-depth board consideration.”
The board chair must understand the challenges and risks facing the entity and focus board time on those issues. Setting the Tone and Culture The board chair sets an example of integrity and ethical leadership for the organization. The board chair’s leadership has an important impact on establishing the culture of the board and organization. “The chair must create an environment that ensures the company conducts itself in the highest ethical and behavioural standards.” “Every organization has its own dynamics and the board chair must build a productive, respectful relationship - not in a high handed manner but by building trust and taking issues back to the CEO without criticism; with sensitivity and integrity.” Many directors argued that the board chair’s influence in the attraction and retention of directors was critical to establishing the board’s culture and ensuring that the board has the skills and experience to effectively provide oversight and add value to the organization. In addition the board chair’s commitment to board and director evaluation and on-going development was key to establishing the board’s culture.
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Managing Relationships Directors felt the board chair is the critical interface between the board and the CEO and among the directors. The board chair encourages and facilitates the contribution of directors. This is critical to ensuring a director’s skills and experience are being effectively utilized and that directors have a sense of engagement and commitment to the organization. The board chair must work with the CEO to ensure there is clear understanding of priorities and issues. “The board chair is the key liaison between the board and senior management and is responsible for addressing difficult issues between the two groups in an attempt to resolve them so that the issues can be dealt with on a consensus basis at board and committee meetings.” “The board chair provides the interface between the CEO and the board between meetings - providing feedback to the CEO about in-camera sessions and acting as a facilitator for contentious issues between the CEO and the board.” “The board chair has the tough task of building a team out of a group of individuals – ensuring strong contribution by all members so management gets full benefit from the board; ensuring good vibrant discussion and debate and bringing it to a close; creating an open, safe environment for people to speak fully; and ensuring the appropriate treatment of input.” In addition the board chair takes the lead to ensure that the board is aware of the concerns and issues of major shareholders, stakeholders and the community.
The board chair has the tough task of building a team out of a group of individuals – ensuring strong contribution by all members so management gets full benefit from the board.
Ensuring the Board is Operating Effectively Directors were emphatic about the board chair’s importance in setting the agenda and priorities of the board and ensuring that the board clearly understands its role with respect to governance versus the dayto-day management of the organization. The board chair has an enormous impact on whether the board is confrontational or collaborative in its approach with management. Many directors used the analogy of an orchestra conductor who draws in the different instruments either together or individually, and sets the pace, volume and quality of the music the orchestra produces. The board chair is responsible for working with management to ensure the board is receiving, in a timely fashion, the quantity and quality of information it needs to consider issues and make decisions. The board chair ensures the committees are appropriately constituted, led and operating effectively. “The board chair organizes and co-ordinates board and committee agendas ensuring they are properly balanced; that the appropriate materials are received in a timely fashion; and, liaises with the management team after the meetings.”
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Important Attributes/Skills Required for Effective Board Chairs We asked directors to identify what they felt were the critical skills and experience required for a board chair. The skills and experience tended to fall into the following broad categories. Leadership Skills Most directors felt that the ideal background for a board chair was previous leadership experience in dealing with complex strategic, succession, human resource, compensation, and shareholder/stakeholder issues. In addition, experience with a broad range of internal and external stakeholders was viewed to be relevant and helpful. “The board chair must have the courage (and energy) to follow through and deal with difficult issues in stressful situations; wisdom and good judgment, gained through relevant previous leadership experience.” “The board chair must be the consummate leader and must have the ability to promote respectful working relationships between the board and management. In addition the chair must have unassailable integrity, great communication skills and lead the board in providing effective oversight of the CEO and management.” Communication Skills The board chair today must be a sophisticated and expert communicator. The following director comments capture the major communication themes. “The board chair needs curiosity. The chair must ask lots of questions and then listen very well. The chair must be able to pull the right information out of board members and management, encouraging rich dialogue to cement decisions. The chair needs a sense of humour and the ability to create an environment of trust and openness where people will express their views.” “The board chair must be conspicuously independent and fair; patient; encourage and ultimately reconcile competing points of view; balance the natural tension that exists between any active board and a strong management team.” “The chair must listen; encourage debate; be the provocateur without offending anyone; dig into corners where no one is looking.” Business/Industry Experience Experience in the organization’s industry or a strong understanding of the business environment in which the organization operates, was identified as an important board chair attribute. If the board chair lacked direct experience in the industry, then directors felt that there should be a very strong interest in the industry supported by operating experience in an environment that had similar characteristics. “The board chair should have a strong understanding of the enterprise and the principal risks facing the organization; sound judgment, and a reputation that gives the board chair credibility.” Time Availability The board chair’s role requires more time and attention than historically has been the case. Directors emphasized that the board chair must be available to spend the time and energy necessary to lead the board in its critical activities; working closely with the CEO and other senior management, board committees and individual directors.
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Board Chair Succession Planning Process The Current Situation in Canada Just over half of all the directors interviewed indicated that there was no board chair succession planning process in place within their organization. Larger companies were more likely to have a process than mid to smaller sized companies. In companies where there was a board chair succession planning process it was more likely to be informal. “I have served on up to ten boards and have had five chair roles - board chair succession planning was never on the agenda.�
Percentage of Respondent Companies with a Succession Planning Process in Place (by Asset Size)
Small
Mid-Size
Large
ALL
No
57%
57%
43%
51%
Yes, Formal Planning Process
19%
16%
25%
21%
Yes, Informal Planning Process
24%
27%
32%
28%
When directors were asked if board chair succession planning received the appropriate amount of attention within their organization forty-nine percent said either it did not or they were not sure. We believe that the results of our survey indicate that there is a significant opportunity for boards to improve the board chair succession planning; especially considering the near unanimous view that the board chair’s leadership has significant impact of on the board effectiveness.
One of the strongest themes in our discussions was the lack of clarity around who has the responsibility for board chair succession planning.
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Percentage of Respondent Directors who believe that Board Chair Succession Planning Receives the Appropriate Level of Diligence and Attention (by Asset Size)
Small
Mid-Size
Large
ALL
Yes
54%
43%
60%
52%
No
41%
43%
29%
37%
Not Sure
5%
14%
11%
11%
Board Chair Succession Principles “The big issue is the ability to deal with a chair who is ineffective or who has simply stayed too long. Ideally, a board will have a succession process which identifies issues and timelines well in advance; ensuring the board has one or more potential successor candidates is critical.” Forty-nine percent of the interviewed directors are currently working with organizations that undertake either a formal or informal board chair succession planning process. Although fifty-one percent of the directors indicated that there was no board chair succession plan in place, many had very constructive suggestions regarding an effective board chair succession planning process. The following summary principles emerged from the interviews and surveys. Accountability One of the strongest themes in our discussions was the lack of clarity around who has the responsibility for board chair succession planning. Nearly all directors indicated that there should be clear responsibility for the process and the majority indicated that responsibility should be part of the governance committee’s mandate. Although some felt it was the responsibility of the current chair, most felt that the process is better understood and more easily managed if it is a committee responsibility. Process Clarity The Governance Committee should have the responsibility for clearly articulating the process and ensuring that it is reviewed and discussed at least on an annual basis. Directors indicated that historically there has been some mystery to the process but that given the importance of the board chair’s role in today’s environment that it was much more constructive to lay out the process in a transparent and open fashion. The Importance of the Board Chair Mandate There must be a clear and current position description for the board chair. This description should be reviewed on a regular basis, as should the skills, experience and background that are required to undertake the mandate. Board leadership requirements change as organizations evolve and grow.
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Board Chair Evaluation An integral part of any board chair succession plan is a regular board chair evaluation process. Ideally part of the process should be a feedback mechanism that provides for the development of action plans and a review of how effectively the board chair has responded to any issues raised in the performance evaluation. “Every board has its own chemistry, and it is difficult to be prescriptive and formulaic about good appraisal and succession practices. The vital essential, in my view, is an annual, confidential appraisal of the chair’s performance, in which all directors are obliged to participate.” Chair Succession Triggers With a rigorous and thoughtful board chair evaluation process, most directors believed that board chair performance should be the key driver when considering board chair turnover. However there were other triggers or policies that directors suggested may be useful in determining the timing of the process: • A director retirement policy. • A limitation to the term or number of terms a director may serve on the board. • Some directors believed that there should be an intense review every three or four years for the board chair, especially if there is no retirement age or term limit. • A number of directors indicated that a change in the CEO was also an important factor in considering the leadership of the Board. There was no consensus regarding the above policies although there was consensus around board chair performance as being the most important factor to consider. “Chair succession needs to be driven by performance.” Directors did however suggest that the board should consider each of the above factors and have a policy regarding their implementation within their organization.
Every board has its own chemistry, and it is difficult to be prescriptive and formulaic about good appraisal and succession practices. Committee Leadership Committees play a vital role in board effectiveness. An opportunity to lead a committee was seen as an important development opportunity for potential board chair candidates and an opportunity for all directors to consider the leadership skills of potential board chair candidates. Director Recruitment Potential board leadership should be an important on-going criterion when recruiting new board members. Directors indicated that attracting potential new directors who have the ability and the time to chair the board is a key element of the board chair succession planning process. Individual Director Evaluation
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Only half of the directors surveyed work with organizations that have a board chair succession planning process in place.
50
%
Directors emphasized that individual director evaluation was an important aspect of board chair succession planning. The evaluations provide individual directors with an opportunity to understand how they can contribute to the board but it also provides the director with the opportunity to identify how the board can improve and be more effective. These interactions over time help boards’ to identify directors who have the confidence of their colleagues and the ability to potentially lead the board. The role of the CEO Most directors felt that it was important that the CEO be consulted and advised throughout the process. Although the CEO should not control the process, nor formally be involved in making the selection, directors emphasized the importance of the CEO and the board chair’s ability to work effectively together.
Summary The interviewed directors outlined what they felt to be the key responsibilities of the board chair and the important skills and experience that are required to undertake the function. In discussions with the surveyed directors, a set of principles emerged that boards should consider in planning their board chair succession process. These principles are not meant to be prescriptive but rather to provide a framework for considering the important issues relevant to planning for the leadership of the board. Directors strongly believe that board effectiveness is inextricably linked to board leadership. Although the board chair has an enormous impact on board effectiveness, only half of the directors surveyed work with organizations that have a board chair succession planning process in place. We believe this provides a real opportunity for many boards.
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