Nominating Committee and Succession

One of the greatest responsibilities shared by boards—indeed, some would argue it is the single most important job of any director—is to manage succession. Oftentimes, whether planning for a change in the make-up of the board or identifying a replacement for a sitting CEO, there isn’t a process in place until it’s too late. Finding candidates with the right credentials, who are good fits culturally, and have what seems to be the right chemistry, takes time and requires a thorough process. It’s not something boards want to be doing under duress.

Chemistry, sometimes overlooked, is as equally important as the skills a candidate can bring to the table. “There’s nothing worse than bringing in a disruptive personality,” says Bonnie W. Gwin, partner at the executive recruitment Heidrick & Struggles. Gwin along with H&S Managing Director Tim O’Shea led a Directorship Roundtable on the role of the nominating committee in succession planning.

A big part of the equation is analyzing the mix of directors and accessing what talents and skill sets are missing. A board also wants to make sure it contains a diversity of backgrounds and mindsets.

"I think it’s easier today to remove board members than it has been in the past because of the changing dynamics of the business—any business." --Tim O'Shea, Heidrick & Struggles

“Like many new public companies, we have venture capitalists on our board,” said Edward J. McGuinn Jr., who has served on multiple public company boards, and now is chairman and CEO of MRU Holdings. “We have what I consider normal board challenges: how do you transition off [underperforming] directors or enlarge the board to bring in more technical skills? We have done our own scorecard and see that we are short on consumer marketing.” To collective groans of acknowledgment, McGuinn added, “On other boards, I have seen directors who should be retiring but who continue to hang on.”

The recruitment experts recommend appointing a lead director to oversee evaluations and troubleshoot hot spots. They also say that it is wise to enforce a mandatory retirement age.

The emergence of the lead director is one of the most important developments in corporate governance in recent years, said Bob Dinerstein, global co-chair of Greenberg Traurig. The role of the nominating committee is to develop candidates and then share that information with the full board. An important part of the development process is director evaluations. These can be used to measure the skill sets and contributions of sitting board members. Used routinely and in a more generic fashion, they can, in effect, help to desensitize the personal nature of performance appraisals, advised O’Shea.

A high percentage of directors devote some of their retirement to board service and in some cases individuals will overstayed their capability or “check out” and become complacent in fulfilling their duties. These are not easy conversations. “Go with more generic skill sets. In fact, I think it’s easier today to remove board members than it has been in the past because of the changing dynamics of the business—any business,” said O’Shea.

What happens when an activist investor turns up and demands a board seat? The best-case scenario is to have a CEO or lead director who is already engaged in a substantive dialogue with that activist investor so that it becomes a mutual decision rather than played out in headlines in The New York Times.

What creates an issue is when there is no alignment of interests, said Gwin. “That’s when it becomes disruptive and challenging to management. Dialogue is a starting point for successfully integrating the activist investor.”

One particularly delicate situation is how to handle a disgruntled board member. Gwin says it depends on how disruptive the individual becomes. “It’s one thing if they’re disruptive and work can’t be accomplished or if they come in and take all of the air out of the room,” says Gwin.

“I think you have to weigh disgruntled versus contribution,” added McGuinn. “There are times when being disgruntled is completely appropriate and results in the tough questions being asked.”