Succeeding at Succession

One of the greatest responsibilities shared by boards—indeed, some argue it is the single most important job of the board director—is to manage CEO succession.

Oftentimes, whether planning for a change in the make-up of a board or identifying a replacement for a sitting CEO, the impetus for change drives the process– and often, that isn’t until it’s too late. Finding candidates with the right credentials, who are good fits culturally and have the right chemistry to deliberate on critical issues effectively, takes time and requires a thorough planning process. It’s not something boards want to be doing under duress.

That’s because it can be a nuanced discussion in which the thinking may shift frequently before arriving at a satisfactory conclusion. To ensure the process runs smoothly, board members know from experience that chemistry, sometimes overlooked, is as equally important as the skills a candidate can bring to the table. “There’s nothing more damaging to a board’s deliberative process 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.

So getting the right mix of skills is the first order of business. “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. “Our challenge is learning the best way to transition directors off the board or to enlarge the board to bring in more technical skills? For instance, we have done our own skills scorecard and see that we are short on consumer marketing,” said McGuinn. In McGuinn’s case, the board will look to add those skills with future members using the scorecard as a directional tool for their nominating committee.

The role of the nominating committee is to create the ‘spec’ for the nomineeds, to work with specialists to develop the candidate list, to review and interview the finalists, and then share their recommendations with the full board. An important part of the development process is to undergo a board evaluation for the sitting directors. 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, provide for a degree of transparency with regard to inputs, while desensitizing the personal nature of performance appraisals, advised O’Shea. Often the lead director or the nominating committee chair will shepherd the board through the evaluation process. In this and other regards, the emergence of the independent lead director is one of the most important developments in corporate governance in recent years, said Bob Dinerstein, global co-chair of Greenberg Traurig and a director at Medarex.

A big part of the equation is analyzing the mix of directors and assessing what talents and skill sets are wanting – a process that should be aligned with the company’s strategy, markets, and environment. A board also wants to make sure it contains a diversity of backgrounds and mindsets. Other well tested remedies that the recruitment experts recommend is appointing a lead director to oversee evaluations and troubleshoot hot spots. They also say that it is wise to enforce a mandatory retirement age, which serves to effect change when needed but can be excepted when the situation calls for it.

Dealing with the director who has outlived his or her usefulness is a very sensitive topic, which board directors would prefer to avoid if possible. For instance, as a high percentage of directors devote some of their retirement to board service, in some cases individuals will overstay their capability or “check out” and become complacent in fulfilling their duties. “On other boards, I have seen directors who should be retiring but who continue to hang on,” said McGuinn. The panel agreed, these are not easy conversations but eventually the complexity of the business world today compels even the most reluctant to consider their fitness for continued board service. “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,” said O’Shea.

Another particularly delicate situation is how to handle the disgruntled board member. Gwin says it depends on the nature of the concern. “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. “But there are times when being disgruntled an indication a courageous board director is willing to take an unpopular position to clarify something the board may not have adequately addressed, and the result is that tough questions get answered.”