One of the greatest responsibilities shared by boards— indeed, some argue it is the single most important job of the corporate director—is to manage CEO succession. Oftentimes, whether planning for a change in the makeup of the 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.
To ensure the process runs smoothly, boards know from experience that chemistry is as 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,” said Bonnie W. Gwin, partner at executive recruitment firm Heidrick & Struggles. Gwin and Tim O’Shea, H&S practice leader, led a Directorship Roundtable on the role of the nominating committee in succession planning.
Its primary roles are to create the “spec” for the nominees, to work with specialists to develop the candidate list, to review and interview the finalists, and then to share its recommendations with the full board. An important part of the development process is also to evaluate sitting directors. These evaluations can be used to measure the skill sets and contributions of sitting board members. Used routinely and in a more generic fashion, board evaluations 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 Robert C. Dinerstein, recently retired global co-chair of Greenberg Traurig and a director at Medarex.
“Quality. Quality. Quality,” said Dinerstein. “The idea that you should recruit only with the goal of finding a woman or a minority—if that’s the principal quality—is not serving the needs of the complex and multifaceted board of today. What boards should seek is true diversity of intellect and experience, in addition to background and heritage, or some combination of those.”
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 mind-sets. Other well-tested approaches that the recruitment experts recommended are appointing a lead director to oversee evaluations and troubleshooting hot spots.
They also say that it is wise to enforce a mandatory retirement age. Dealing with a director who has declined in his or her effectiveness is a very sensitive topic, one that 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. “On other boards, I have seen directors who have not kept abreast of the current marketplace and competitive demands; they should be retiring, yet they continue to hang on,” said Edwin J. McGuinn, Jr. The panel agreed. These are not easy conversations, but eventually the complexity of business will compel even the most reluctant to consider his or her 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.
The Disgruntled Director
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’ is actually an indication that a courageous board director is willing to take an unpopular position to clarify something the board may not have addressed, and the result is that tough questions get answered.”
Do sitting CEOs make good directors? The consensus was that having CEOs on a board is a good thing, but the panelists also agreed that a board full of ex- CEOs would not be desirable. Diversity pertains to experience, too. “I’m a big believer that diversity in every dimension is what makes a great board,” said Gwin.
“More than diversity, I think the characteristics of what makes a great CEO may not always be the same qualities that work in the boardroom. For one, they tend to be more dominant as directors,” said veteran director Raymond S. Troubh, “and they often continue to conduct themselves as managers. Personally, I prefer to serve on boards where there’s only one outside CEO on the board.” To that point, Susan Schiffer Stautberg sees director selection as becoming more skill specific while CEOs tend to be generalists: “We think that more and more corporations are looking for specific skill sets—an executive who really knows marketing or a specific market, has proven management talent, and can work with teams and C-level people.”
One distinct advantage to having current or former CEOs on any board (although not the former CEO of the same company), said Robert Barbanell, is that “they’re important as mentors to the current CEO,” which also improves director development and succession. “I absolutely agree with that,” said Gwin. “Serving as a confidante or counsel to the CEO can be valuable, and it’s important to have that skill-set at the table. That director can be a current or sitting CEO or have experience as a division president or some other top leadership role at a world-class organization.” The issue of racial and gender diversity is one that has been long discussed by boards and governance practitioners. “Is ethnic diversity these days a primary or secondary filter?” asked one participant. Gwin advised that it is no longer a primary objective for enlightened companies that look at diversity as part of a set of values rather than diversity for diversity’s sake. In recent years, there’s been an evolution due largely to strides made by boards to be more inclusive, she said. Companies that truly pursue a diversity of backgrounds and experiences will naturally achieve gender and racial diversity.
“Quality. Quality. Quality,” said Dinerstein. “The idea that you should recruit only with the goal of finding a woman or a minority—if that’s the principal quality—is not serving the needs of the complex and multifaceted board of today. What boards should seek is true diversity of intellect and experience, in addition to background and heritage, or some combination of those.”
Today’s videoconferencing technology also makes possible greater geographical diversity, since traveling to every meeting is no longer a requirement on some boards. Stipulations for director involvement, however, have never been greater, noted Jeffrey Cunningham, chairman and CEO of Directorship and a director at TheStreet.com. “When recruiting a director, what do you tell them about the workload?” he asked.
“You need to be completely upfront on that topic,” said Gwin. “I typically tell candidates to expect 300 to 400 hours a year. You don’t want a director who isn’t prepared or is shocked by the workload. There’s no question, the director’s job is demanding.”