Get to grips with succession planning or jeopardise your success. That was the uncompromising message for companies in a recent discussion paper from the Financial Reporting Council (FRC).
“The absence of a [boardroom] succession plan can undermine a company’s effectiveness and its sustainability,” the paper said. “It can also be a sign that the company is not sufficiently clear about its purpose, [or] the culture and behaviours it wishes to promote in order to deliver its strategy.”
Research by Schillings, the law firm, suggests succession planning can also have an effect on how a company is viewed by investors and analysts. “Where they have complete confidence that a business has the processes in place and knows what it is doing, they apply a premium,” said Chris Scott, a partner at Schillings. “And where they don’t, they discount it.”
He added: “ The market looks at the management team and factors its preparedness into the valuation. They want to know that, if there is a change in the executive or non-executive team, it will still have a clear understanding of what is needed.”
The FRC has no plans to change the UK Corporate Governance Code as a result of its paper on succession planning, to which it is still seeking responses, and it acknowledges that no single approach to board continuity will suit every company. However, it does expect companies to do more than pay lip service to the idea.
“Succession planning should be an integral part of setting company strategy, but it tends not to be prioritised and sometimes gets left aside,” said David Styles, the regulator’s director of corporate governance, adding that there is a sense that boards pay more attention to their audit and remuneration committees than to their nomination committee.
As to why this might be, it could be as simple as the fact that it means addressing awkward questions. “Let’s face it,” said Styles, “there are sensitive issues. We are talking about people’s performance, their career progression.
“[But] you need to refresh the board to deliver company strategy, which means you need different people on boards — both executive directors and Neds — as the company moves forwards.”
Finding those people takes time and effort — both also factors in succession planning being pushed down the agenda. “I don’t think there is a shortage [of candidates],” said Styles. “It is a matter of working effectively to see the full range of options.”
This is where one boardroom issue runs into another, with Styles believing that the Davies report promoting board diversity may have helped succession planning more broadly by getting the top ranks to put extra effort into finding women to join them.
Suki Sandhu, chief executive of Audeliss, an executive search firm, is less confident. He believes companies have over-focused on appointing women Neds at the expense of developing female executive directors, meaning they are not developing the next generation of women Neds.
This in turn means diversity could “go into reverse” over the next 18 months or so, he said. “The data suggests that today’s female Neds average only a 5.5-year tenure, which means we are fast approaching a period when many of the current leaders will stand down. The question now is, who will replace them? The pipeline of female executive talent is simply too thin to sustain the progress of the last five years.”
At the moment women make up just under a third of FTSE 100 Neds; this could drop to 17% by April 2017 if women Neds leave at their current rate and are not replaced, Sandhu said.
Another factor is working against succession planning and diversity, and this is that executive tenure is shortening, said Craig McCoy, chairman of the London HR Connection. “The average chief executive now spends two or three years in that role,” he said. “It makes it more difficult to grow talent internally when you have a revolving door. If you need to do a big project or a critical piece of work, you may not have the time to help people get up to speed.
“Business people fill in succession planning forms, but when push comes to shove they call a headhunter.”
Even those headhunters appreciate a bit of notice, said Gary Chaplin, who runs his own search practice in northwest England. “Companies that give themselves a long lead time can work out what skills they need and start planning,” he said. “They can come to people in my profession and say, ‘Come January 2017, we will need to replace a Ned — these are the areas we want to cover’.”
This gives the search firm time to look widely for someone with the right skills and the right personality. It also gives the potential Ned time to get to know the business so that a connection has already been formed by the time he or she joins.
“Otherwise, companies will fall into the ‘beggars can’t be choosers’ trap,” said Chaplin.
Young hearts in the boardroom
Finding future executive directors means paying attention to today’s young people, according to Jo Parker, chief executive of the PR company Chime Specialist Group.
“You have to look ahead and invest in a pipeline of executive talent for the future,” she said. “We have to make sure our executive directors have responsibility for developing future leaders.”
One way in which they do that is mentoring. Another is working with them on the “youth board” that Parker set up three years ago. “It’s made up of our most promising stars, aged 30 and under. Giving our most talented young people board experience gives them exposure and the opportunity to accelerate their learning.”
Parker encourages her high-flying young managers to get Ned experience as well – becoming a charity trustee is a good option, she said – but the initiative’s main goal is to develop executive talent. “Having Ned experience helps with that and makes people more rounded,” she said. It may also help to build the pool of potential Neds, although the skillsets needed are so different that it will not be enough on its own, she added.