Melissa Means

There are several key considerations for organizing an effective search committee to manage and keep the rest of the board informed about and appropriately involved in the internal and/or external recruitment process.

Once the decision is made to establish a search committee, the first person appointed should be the chair. The best candidates to lead the committee typically are directors who have been through a CEO transition, who live within a reasonable distance of the company’s offices (because of the likelihood of numerous in-person meetings), and who have the available time, leadership skills and commitment to see the process through to completion.

Once a chair has been identified, the board should determine the committee’s size and membership. Many search committees are comprised of three to five board members, including the independent chair of the board/lead director and a representative from the compensation committee. The COB/lead director and the search committee chair are charged with keeping the full board in the loop, while the compensation committee representative ensures continuity with the company’s existing compensation program as the incoming CEO’s pay package is developed.

Next the board should decide whether and how to compensate search committee members. Most companies provide additional pay for service on the three major standing board committees (audit, compensation and nominating and corporate governance) in the form of cash retainers and/or meeting fees. However, we find many boards overlook the need to consider compensation for a newly created ad hoc search committee.

As a general rule, any decision regarding whether to compensate an ad hoc committee ideally should be made prior to the committee’s formation. Once the committee has begun its work, it may appear self-serving to go back and compensate members for services already provided. In our experience, companies that consider the issue upfront do end up providing some form of compensation. We recommend that the additional payment be delivered entirely as a cash retainer, rather than as meeting fees, because of the issues involved in having to define and track search committee meetings. Typically, companies set a cash retainer for an ad hoc committee’s chair and members that approximates the cash retainer provided to the audit and compensation committee members.

Following these simple steps for managing the process of establishing a search committee will help the company and the board start off on the right track toward a successful CEO transition.

Melissa Means is a managing director in the Boston office of Pearl Meyer & Partners, where her areas of expertise include total compensation strategy, executive compensation, short- and long-term incentive compensation strategy and design, market practices benchmarking, and board of directors compensation.

Jane Stevenson

Succession planning should be a key priority for boards in order to drive sustained growth. Boards should consider steps they can take to develop a deep bench of future CEO candidates – internally and externally – both for the near term and 3-5 generations into the future.  Here’s how boards can ensure they are identifying, developing and retaining those leaders now.

1. Plan in Advance
CEO succession should not be thought of as a short-term process or an event triggered by the need to replace the incumbent CEO. Board/CEO discussions should be on-going and should address the company’s needs for the short, mid and long term. Ideally, the board should be thinking 2-3 CEO moves ahead.

2. Engage the Board
The board should fully own the CEO succession planning process and meet consistently throughout the year to discuss succession bench strength for short-, mid- and long-term needs. Look at leaders both inside and outside the company; understand who the rising stars are in your industry sector. Be involved in talent development and identify the leaders who will define the future. Ideally, boards should set up succession subcommittees to drive this process.

3. Set Up a Formal Assessment Process
Establishing a formal assessment process helps ensure standards for sustained leadership are met. Facilitated by the CEO, it also provides the board with another opportunity to evaluate priorities and needs. A formal assessment process ensures that board members have quality information with which to evaluate future leaders.

Peter Thies

4. Create a “Future CEO” Profile
The board should create CEO profiles that align with the company’s business strategy, representing the short-, mid- and long-term competencies that mirror the anticipated strategic needs of the company. Having future CEO profiles helps to ensure that the right bench strength is in place for future generations of CEOs.

5. Expand the Pipeline
The wider and deeper the pipeline of candidates is, the better. While companies should first look to develop talent internally, they should also have knowledge of top talent in the external market. An expanded pipeline of quality internal and external candidates provides more options to the board at any given time. Multiple options lower the board’s risk factor.

6. Expose the Board to the Bench
There are at least seven future CEOs in every organization. Board members should interact with the company’s highest potential leaders in a variety of settings. In addition to board presentations, high-potential leaders should interact with the board through regularly scheduled board dinners, board mentoring opportunities or rotating one-on-one/small group sessions with board members. Greater first hand exposure to the company’s top talent gives board members valuable insight into the company’s true executive pipeline.

7. Address Succession Dynamics Head On
Succession is a sensitive topic for boards and CEOs. This should not deter the process. There are straightforward ways of aligning the board and CEO on the process, avoiding “horse races” internally, engaging the incumbent CEO and productively managing expectations of all involved.

8. Talk Succession Regularly
The board should plan for a formalized annual discussion with the CEO on succession planning along with at least one mid-year update.  These sessions should keep the topic on the board’s radar as a continuing priority.

9. Manage the Transition
The handoff between incumbent and successor should be planned well in advance. Communication should be planned carefully, and all parties involved should know their role in the process.

10. Plan for Sudden Loss of Leadership
In parallel with the long-term approach described here, companies need to have an emergency CEO succession plan in place at all times.  This plan should be reviewed at least once annually, and should include multiple options for leadership.

Jane Stevenson is vice chairman of Board & CEO Services at Korn/Ferry International’s Atlanta office. Peter Thies is senior partner and industry leader in the Financial Services Leadership and Talent Consulting division at Korn/Ferry International, operating out of their New York City office.

The report, titled “CEO Succession 2000-2009: A Decade of Convergence and Compression,”  presents data on CEO succession over the past decade and reveals global trends regarding CEO turnover and the new role of the chief executive. The research, conducted by Ken Favaro, Per-Ola Karlsson and Gary L. Neilson, found that in 2009 worldwide turnover rates remained at the relatively high level of 14.3 percent, a percentage that hasn’t changed much in the past five years. Regional succession rates in 2008 also remained consistent.

“The harmonization of CEO turnover rates suggests that global governance norms are emerging—not by fiat, but through practice—across the world and in every industry.”  This convergence is accompanied by specific trends that have redefined the role of the CEO.

In America and Europe, there is an increased tendency to split the CEO and chairman roles, despite no evidence that one method of governance outperforms the other. In Europe, the percentage of incoming CEOs who also hold the chairman role dropped from over 60 percent in 2002 to 7.1 percent in 2009. North American companies showed similar tendencies.

Gary L. Neilson, a senior member with Booz & Company and co-author of the report, believes that, despite no proven performance benefits, this separation of powers is “good for accountability and also for focus.”

Neilson and the team at Booz did find a trend that corresponds directly to improved performance, however; four out of five incoming CEOs in the past decade were appointed from within the company. This is not simply a global coincidence. The trend makes perfect sense, because, as the report says outright: “Insiders perform better.” Insiders are more knowledgeable about the company, its challenges and opportunities. They are familiar with the people surrounding them and may appear more accessible to others. These qualities reflect company performance, and, according to the report, are supported by the numbers: “Of the CEOs leaving office, insiders have produced superior regionally market-adjusted shareholder returns in seven of the last 10 years, averaging 2.5 percent; outsider-generated returns, in comparison, have averaged 1.8 percent.”

Not surprisingly, insiders tend to last longer, too. Over the past decade, insiders held office an average of 7.9 years compared with a tenure of six years for the outsider. In nine of the past ten years, outsiders have been forced out of the CEO role at a rate higher than insiders.

The tendency towards planned succession is a product of rough economic times: “It’s no accident that planned successions have been increasing for the past three years on a global basis,” says the report, “In a time of economic upset and severely clouded visibility, boards have been loath to make sudden moves.”

The convergence of trends like preference for insider succession, a separation of the CEO/Chairman role and average turnover rate is met by what the report aptly calls “compression,” or a smaller window of time to produces results. The global mean tenure of departing CEOs has dropped from 8.1 years to 6.3 years during the past decade, according to the report.

While the report advises a swift implementation of new agendas and a distinguishable set of goals, it downplays the idea of “the first 100 days.” Neilson notes that though this is a “good period to show that action is, in fact, taking place, fundamental change does not happen in 100 days.” It’s important to take a realistic approach to the new position, especially when the transition is still in its seminal stages.

The report offers valuable advice to the incoming CEO in his new complex and increasingly delicate role. The team at Booz & Co. spoke with 14 current CEOs for some inside information about how they run their companies. What emerges from the interviews is valuable advice for any incoming CEO.

Read the full report with the interviews here.

There are already a variety of regulatory reform proposals on the table and a broad spectrum of policy actions ready to be implemented by different nations in an effort to address the widespread feeling of discontent flowing from the recent financial crisis. There is an alternative path, however, that may prove to be a more productive and powerful force of change—one that is driven by the corporate sector itself. Progressive companies are taking the opportunity to “lead by example,” promoting the key tenets and principles that will help restore investor confidence. In effect, their day-to-day interactions with all stakeholders demonstrate how to live the right values and ethics.

The starting point for this journey is the board of directors. Collectively, the board has the responsibility for the future direction of the enterprise, its impact on stakeholders and society at large. The board directly influences the critical management actions to drive short-term financial results, incent long-term value creation and develop strategies and plans that will ensure sustainable growth.

After the recent holiday break, a dozen Fortune 500 directors were asked for their thoughts on the biggest changes they see on the horizon and the implications for the boardroom. Common themes included greater globalization pressures, additional regulatory intervention and the potential rise of national protectionism. Many thought the current flashpoint issue of executive compensation must be addressed quickly to begin restoring investor confidence and credibility on Main Street.

The directors shared the view that a possible long-term, slow growth economic environment, combined with the aforementioned external forces, would challenge boards to become more transparent with key stakeholders on the major decisions that affect the enterprise. They see stake- holders continually “raising the bar” on board performance and taking a more proactive role in influencing the board through enhanced proxy access and more targeted advisory votes.

The fundamental issue to be addressed is how best to rapidly propagate the hallmarks of highly effective boards across the broadest group of companies while promoting the right governance principles and values. When one looks back on the prior decade, from Enron at the beginning, to Bear Sterns and Lehman Brothers at the end, it is easy to conclude that the core    enablers of boardroom change are already taking shape—a large pool of engaged, qualified directors; more shareholder-friendly director election processes; and a viral 24/7 communication cycle that ruthlessly disseminates information on any type of misstep or egregious behavior.

What is still needed is a common forum that brings together the best ideas, innovative practices and new approaches in a non-threatening environment that encourages collaboration and action across boardrooms.

One idea currently building momentum involves creating a closely linked global network of corporate chairmen and lead directors to serve as the primary conduit to more rapidly exchange current best practices, practical insights and actionable ideas. Its mission would help accelerate the development of highly effective boards and promote more progressive shareholder relations and corporate responsibility agendas. As one of the survey respondents concluded, “If I could wave a magic wand today, I would create a self-policing entity that would watch over the large public-company boards and help ensure no one went off the tracks, not the Securities and Exchange Commission, not Institutional Shareholder Services, but a group of practicing chairman and other board members who are fighting the good fight every day, with the goal of looking back in ten years to see a continuous improvement in corporate values, ethics, incentive systems, sustainable business growth and the impact on the global community.”

Should the board put together a succession-planning framework?
Succession should always be on the board’s agenda, and so they need a formal framework as a guide, which should be reviewed no less than annually. Some of the specifics depend on where they are in their CEOs career cycle. If you’re coming up to a succession event, you should review it at every board meeting. Importantly, boards should have in place an emergency succession plan as well.

For the new director, what other board roles are subject to succession-planning?
Board leadership is very important, and that has implications for succession. There should certainly be a framework for succession of the lead director or a non-executive chair. For committee chairs, there should be communication about succession—at least annually.

What is the talent pool like for new directors these days?
A decade ago, chief executives, chief operating officers, chairmen, presidents and vice-chairmen represented roughly half of the pool of new independent directors. In 2009, the proportion of new directors with these backgrounds was only 26 percent. A primary driver is the drop in the number of active CEOs serving on outside boards. The increasing demands of board service have also triggered a greater reliance on retirees as potential directors.

What are the qualities boards look for now in CEO candidates?
At the start of the CEO search process, it can be tempting for companies to assemble a “dream sheet” for their ideal chief executive. But the size, scale and complexity of many organizations today can make it impossible for a single person to offer every competency. Instead, boards should first look at where the company is and where it needs to go. A corporation that is underperforming likely needs a strategic, transformational CEO. A fundamentally sound organization seeking to advance its existing position, on the other hand, might need a strong operator who can continue to improve on the organization’s operating model. These two kinds of leader aren’t mutually exclusive, but the best strategists may not have equal skills as world-class operators, and the best operators aren’t necessarily the best strategists.

What is the CEO talent atmosphere like today for high-risk organizations?
The talent pool for suitable leaders is not always tremendously deep. However, we are still seeing strong interest from candidates willing to tackle extremely difficult opportunities.The CEO role may be more challenging than ever, but it is still highly attractive to many.

With the SEC and investors demanding greater transparency on succession plans, how are you advising boards?
Companies will, of course, now be moving to make shareholders more aware of their efforts. We are reminding boards that the most important priority is to have compelling and comprehensive plans across the various scenarios they may face. The issue of what aspects of those plans get disclosed, and how and when, is far easier to work out with the informed advice of counsel.

How are boards approaching diversity in light of recent SEC rules?
Boards recognize that it is good to have people in the room who don’t all look alike—so that might mean, for example, having a director from overseas. For some boards, that is the diversity they need. Others are still trying to make more basic strides.

Do you see a power shift from insiders to independent directors? Will this continue and why?
Most boards no longer have insiders other than the CEO so I think we’ve already seen a shift toward totally independent boards. I find boards are taking greater responsibility for the governance of the companies and so there has been a slight shift of power towards the board as it relates to governance. Given the experience of the past two years, boards and management are working more closely than ever.

ADDITIONAL COVERAGE IN THE BOARDROOM GUIDE FOR THE NEW DIRECTOR::

• Preparing for Your New Role as a Director
• A Message to New Directors From Duncan L. Niederauer
• Performance and Pay Alignment: A Top Priority for Compensation Committees
• Congratulations, You’re the Audit Committee Chair. Now What?