companydirectors.com.au ASX 200 Roundtable Summary Paper 2015 Succession Planning ASX 200 Supporting Partner

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1 ASX 200 Roundtable Summary Paper 2015 Succession Planning ASX 200 Supporting Partner

2 Succession Planning At a recent Australian Institute of Company Directors ASX 200 round table, directors agreed that the appointment of the CEO is arguably the single most important decision made by the board. It will affect the company s culture, determine the company s ability to attract a high performing executive team and is key to driving shareholder value. The Australian Institute of Company Directors appreciates the participation of ASX 200 directors in these roundtables. This paper provides a summary of key themes from the roundtable discussions. The ideas presented in this paper are not necessarily the views of the Australian Institute of Company Directors and may not reflect the consensus view of roundtable participants. Sometimes a CEO has to leave the job suddenly due to accident or illness, or because he or she has been fired. The board might feel obliged to appoint a replacement quickly but should hold out for the right person. In the meantime, it can appoint an interim CEO such as one of the directors. Key summary points 1. The average tenure of a CEO is now about four years so succession planning should be an ongoing priority. 2. The behaviours, objectives and strategies of an organisation all reflect the CEO; it is vital that the board appoints the right person. 3. An internal appointment suggests that an effective succession plan is in place but not everyone can make the leap from managing a division to running the company. 4. CEOs appointed from outside the organisation bring experience and a visible track record but may not be a good fit. 5. Most boards will make at least one poor choice and, when they do, they should act quickly to acknowledge and rectify the mistake. Selecting the right CEO is a major responsibility for the board. Companies reflect the behaviours, objectives and strategies of the CEO and many corporate disasters can be linked to a CEO who is inappropriate or a poor fit. The average tenure of a CEO has now contracted to about four years, which means succession planning should be an ongoing priority. The board will eventually have to decide whether to appoint someone from within or outside the organisation and, if there are possible candidates within the organisation, should feel confident there is time to groom them for the role. The pros and cons of an internal appointment An internal appointment is often considered indicative of a well-run company with an effective succession plan in place. It also brings a number of advantages. For example, past behaviour is generally the best predictor of future behaviour so the board should have a good insight into an internal candidate s skills, abilities and leadership style. However, not everyone has the ability to make the quantum leap from managing a division to running the company. A good general manager who is used to focusing on the detail and the daily issues of a particular division will probably be equipped to set the organisation s short term objectives. However, long term strategy requires very different skills, as does effective implementation of that strategy. ASX200 Roundtable: Succession Planning Page 2

3 Managing the success process is particularly difficult if the CEO has been pushed. A really skilful board will make the CEO think it was his or her own decision. A candidate s ability to set an appropriate culture for the organisation is often overlooked yet this is one of the CEO s most important roles. The fundamental values and principles of the company must be well understood by everyone within the organisation, and a CEO running an international organisation must feel confident that the culture extends outside Australia. It is vital that everyone in the business thinks about it in the same way. CEOs are also charged with developing and maintaining relationships with stakeholders ranging from the board, workforce and shareholders to governments, media, analysts and investors. Internal candidates are unlikely to have much experience beyond employees and, possibly, customers and suppliers. The fact that a candidate has grown up within an organisation can be a hindrance in itself. They are already part of whatever culture the departing CEO has created and might find it difficult to effect radical change. Directors who favour internal success face the challenge of structuring the organisation so that there is a realistic pathway to the position of CEO. Gaining experience Years ago, when communication tools were far less sophisticated, a divisional or regional manager could make a mistake or two away from the spotlight and learn from the experience. This was a way of developing judgement at a relatively early stage but this environment is now impossible to replicate. Some directors believe that internal candidates should gain experience by rotating through the various divisions of an organisation. The intention would be for them to gain an understanding of a wide range of issues and the ability to ask the right questions rather than true expertise. Another director expressed concern that this practice could introduce an element of risk by having areas of the company run by a CEO in training rather than the best person for the job. Evolving governance and compliance constraints may also make these kinds of rotations less feasible than in the past. One director wondered whether the board should encourage potential CEOs to gain experience by running a small business elsewhere rather than trying to find ways for them to develop internally. Another pointed out that ambitious managers will always observe people one or two levels above them to identify gaps in their own skills and experience. If they can t fill those gaps within the organisation, they will inevitably look elsewhere. Assessing the potential Directors who engage with senior managers on a regular basis will be better placed to assess their potential as a CEO. Boardroom presentations can be misleading because some people perform ASX200 Roundtable: Succession Planning Page 3

4 Don t make the changeover too long. As soon as people know the CEO is a feather duster the phone stops ringing and everyone within the organisation starts jostling for position with the new one. better than others in this setting. A less formal situation can be far more revealing. Some boards invite all senior managers to every board lunch while others arrange for one or two directors to spend time with a senior manager on a site tour or overseas visit. There is a trend towards subjecting internal candidates to a rigorous assessment process. However, this could set up such a high level of expectation that some of those who miss out on the promotion will feel too frustrated to continue with the organisation. One director gave an example of what might be a less risky approach. The board discussed the succession process with the potential candidates, including the fact that they might be disappointed, and all said they would like to be considered for the role. Only one unsuccessful candidate resigned and this was because the process had made him realise that he could only gain the experience he needed outside of the organisation. Bringing in an outsider Most CEOs appointed from outside the organisation have already held the position elsewhere, so they bring the benefits of experience and a visible track record. The most common problem is that even the most accomplished may not be a good fit in terms of performance or culture. The selection process For the board, the first steps of the selection process are to articulate a clear vision for the future of the organisation and then identify the skills needed to achieve that. These change over time; however successful the current CEO, the board may need to look for quite different abilities and specialisations. It is very important to have this information in place before starting to talk about specific people. The board should also be clear about the values they expect from a CEO, such as openness, honesty and transparency. Ideally, the current CEO will accept the need for change and be keen to find a suitable replacement. If this is not the case, the board might be tempted to search for a successor in secret, though this can lead to problems when the truth is inevitably revealed. If the CEO is spiteful or determined to fight the board s decision, managing the process can be one of the most difficult aspects of a director s job. A quick changeover Once the succession has been announced the changeover should take no more than a month. Any longer could be unsettling for both the markets and people within the organisation. Most boards engage one or more search consultants to help them identify external candidates. Even if an internal candidate seems almost certain to be appointed this could be considered good ASX200 Roundtable: Succession Planning Page 4

5 Extremely vocal shareholders and analysts can make some boards feel they are being pressured or even blackmailed into a particular choice. governance, demonstrating to shareholders that there is no question of an outdated old mates approach. Consultants can sometimes bring an exceptional candidate to the board s attention and, in formulating their search, they may provide helpful insights into the organisation itself. Managed well, consultants can be very valuable but, naturally, some are more proficient than others. It is important to find one who is not only good at the job but works well with the board. An external appointment is, nevertheless, something of a gamble, with search consultants reporting a success rate of only about 50 per cent. Some have suggested that boards might improve these odds by providing a new CEO with a more extensive induction process and continuing support. Rectifying a mistake Most boards will make at least one poor choice and, when they do, they should act quickly to acknowledge and rectify the mistake. Individual directors may be concerned about their reputation but they have a duty to shareholders and other stakeholders to ensure that the company is well run. Sometimes a CEO has to leave the job suddenly due to accident or illness, or because he or she has been fired. The board might feel obliged to appoint a replacement quickly but should hold out for the right person. In the meantime, it can appoint an interim CEO such as one of the directors. Every chairman should speak to shareholders once or twice a year about governance matters. This is an opportunity to canvass their views on strategy and their opinion of the current CEO so that, when the time comes to appoint a new one, the board can be sure that the skill sets and priorities they are searching for are aligned with shareholders views. Extremely vocal shareholders and analysts can make some boards feel they are being pressured or even blackmailed into a particular choice. Ultimately, it must be the board s decision. A fixed term Some directors at the Round Table felt strongly that CEOs should serve a term of no more than six or seven years. As one pointed out: It s a demanding role and if a CEO hasn t implemented all of his or her ideas after seven years you would have to wonder why, The accelerating pace of disruption to the business model could also require a relatively rapid turnover of skills. Other directors pointed to CEOs who have been in the role for much longer than seven years and are still doing an excellent job. One expressed concern that, if a six or seven year limit is imposed, companies might miss out on the benefits of having a CEO who has ASX200 Roundtable: Succession Planning Page 5

6 grown with the business and might be better equipped to deal with disruption and transformation than a replacement. However, the consensus appeared to be that this would be the exception rather than the rule. One director suggested that, in cases where CEOs have served exceptionally long terms, perhaps as long as 30 years, the immediate successor will inevitably be something of a sacrificial lamb. When the structure of the whole organisation is so entrenched and the board itself is quite possibly stale, the process of revitalisation could take two or more CEO incarnations. Disclaimer Copyright in this material (Material) is strictly reserved. Any disputes arising out of the Material are subject to the laws of the state of New South Wales, Australia. No part of the Material covered by copyright should be copied or reproduced in any form or by any means without the written permission of the Australian Institute of Company Directors. The Australian Institute of Company Directors endeavours to contact copyright holders and request permission to reproduce all copyright Material. Where the Australian Institute of Company Directors has been unable to trace or contact copyright holders, if notified, the Australian Institute of Company Directors will ensure full acknowledgment of the use of copyright Material. The Material has been prepared for information purposes only and is not intended to embody any professional or legal standard. The Material does not constitute legal, accounting or other professional advice. While all reasonable care has been taken in its preparation, neither the Australian Institute of Company Directors nor any contributor makes any express or implied representations or warranties as to the completeness, currency, reliability or accuracy of the Material. The Material should not be used or relied upon as a substitute for professional advice or as a basis for formulating business decisions. To the extent permitted by law, both the Australian Institute of Company Directors and all contributors exclude all liability for any loss or damage arising out of the Material Australian Institute of Company Directors ASX200 Roundtable: Succession Planning Page _15