ASX 200 Roundtable SUMMARY PAPER 2016 Board succession planning and composition Dynamics, diversity, bias and behaviour ASX 200 SUPPORTING PARTNER
Board succession planning and composition Assembling a company board is a bit like picking a football team. The boardroom needs the right mix of skills and experience, but also needs directors who can operate as part of a team. When new directors are brought on to a board, they need to enhance and complement the existing skills mix. They should be strong enough to speak up and assert their options while at the same time recognising they are part of a team. A well-planned and well-executed succession strategy can help achieve this, and can ultimately lead to a better functioning and more effective board. A decade ago, it wasn t uncommon to see large listed company boards replace, two, three or even four directors in the same 12 month period suggesting there wasn t a lot of succession planning or foresight going on. Many boards are being much more proactive in their appointments these days, but there remain some even large company boards which are not doing succession planning well. Board succession planning key points Succession planning for boards should be a continuously evolving piece of work Boards need to overcome unconscious bias and not recruit their own likeness A chair s character can be more important than industry experience for leading the board. The Australian Institute of Company Directors hosted a series of roundtable events on board succession in February 2016 in Melbourne, Sydney and Perth, supported by the Commonwealth Bank of Australia. 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 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. BOARD SUCCESSION PLANNING AND COMPOSITION 2
The basics There are four basic steps for successful succession planning. 1. The skills matrix The first step in board succession planning is the development of a skills matrix. Each director is interviewed to get their view on the skills and experience needed for that board. This will help identify gaps and overlaps and allow the board to start thinking about new appointments. 2. The board succession plan Next is developing a board renewal and recruitment plan for the next 12 to 24 months. This identifies each director s current length of tenure and how much longer they plan to serve. Directors can also privately express any concern they have with other directors tenure. The plan includes an assessment of the readiness of directors and candidates for key roles, including the chair, and chairs of the Audit & Financial Risk Committee, the Health, Safety & Sustainability Committee, the Remuneration Committee and the Nominations Committee. 3. Board search Conducting a board search aligned with the gaps identified by the board skills matrix is next. This involves the chair and the Nominations Committee constructing a detailed brief on the personal skills and experience required by the new director. From there, potential candidates are identified and researched then whittled down into a short-list before interviews and an eventual appointment. 4. Ongoing board succession planning Board succession planning is a continuously evolving piece of work. Boards test the skills they need now as well as the skills they are likely to need in the future, thus the succession plan is continually evolving as needs change, and hold a review every four to six months of the available talent against planned retirements. BOARD SUCCESSION PLANNING AND COMPOSITION 3
Other considerations Boards need to overcome unconscious bias and not recruit their own likeness. Diversity Boards need to overcome unconscious bias and not recruit their own likeness. They need to embrace contrarian views around the board table and people with a preparedness to ask the stupid questions. This plays into board diversity. Many directors are currently grappling with this issue, but diversity means more than getting a better gender balance around the board table. It s also experience, cultural background and so on. Boards are starting to put more focus on having a spread of ages. This means younger directors, but also older directors - as Australia s population ages it is also important to have older representation. A decade ago, a director aged over 65 would have struggled to win a new board appointment, but that is changing. Boards and their advisors should test the brief when they re looking for a board appointment. Sometimes the initial parameters around the sort of director that is being sought aren t the result of much planning, but are reactive and can result from boards unconscious biases. Just because an investment banker is leaving the board, for instance, doesn t mean their replacement should be another investment banker. Specialist skills When boards construct their skills matrix, they need to make a differentiation between the skills the board will need on an ongoing basis and those other skills that will be required only periodically or for a specific project. Sometimes it is better to acquire those latter skills through a consultant rather than seek to have them specifically represented on the board. For instance, individuals who have a deep technical expertise usually won t also have operational experience and will lack the senior executive experience that many of the other directors around the board table will have. It raises the question of how much of a contribution they might be able to make to the broader board discussions and whether their technical expertise would be better sought externally. BOARD SUCCESSION PLANNING AND COMPOSITION 4
Overseas directors can provide valuable diversity to a board, particularly for those companies with a focus on other markets. Also, when looking for new members, boards need to be careful not to lose sight of their key role that is to hire and fire the CEO and to take a helicopter view of the company, not to be directing the traffic. This is another reason for caution when seeking specific skills for the board. Overseas directors can provide valuable diversity to a board, particularly for those companies with a focus on other markets. But directors need to consider how having a director who is based in another country will affect board dynamics and effectiveness. These directors might be less available for many of the informal catch ups that help build trust and understanding between directors. Soft skills A few years ago, it wasn t uncommon to have between three and six former CEOs around a board table. Having such a large number of directors accustomed to the command and control way of interacting with colleagues did not always make for the most consultative or cooperative board. The preponderance of former corporate leaders around a single boardroom table is lessening. Many of Australia s more prominent chair s these days might never have been chief executive. Instead they might have run a professional services firm, for example. In some ways this is a good grounding for a chairmanship, because the managing partner or chief executive of a professional services firm doesn t in reality have as much power as a CEO. Hence they have to work through influence and collaborate and consult with their colleagues regularly. The chair When it comes to appointing a chair, boards should be open-minded about whether or not the chair needs to have skills and experience in the company s particular sector. However, they should have a depth of experience as a director, and if they re taking on the chairmanship of a significant company they should have served on ASX-100 companies. They might also hold leadership roles on the current board, such as committee chairs. The character traits of the individual are often more important than specific skills when it comes to successfully facilitating a board s deliberations and decisions. A board is fundamentally different from a management team and any group of individuals will have one or two dominant voices, so the chair has to be someone who can give everyone a say and have regard for the skills sets and expertise of individual directors. They need to have the selfconfidence and intellectual acumen to be able to manage an open rather than a closed debate and to draw out discussion from around the table. BOARD SUCCESSION PLANNING AND COMPOSITION 5
" There is also the issue of how much of a role the CEO should play in board succession." The chair has to be open-minded enough to accept diversity on the board and also promote it so other members of the board also accept it. Often a new company chair is already an existing board member. In fact, boards should ensure there are multiple options around the table for chair succession. Sometimes it is self-apparent who the next chair should be. Aside from their own recruitment, the chair also obviously plays a central role in the recruitment of new board members. They are generally members of the nominations committee and signoff on the brief for the hunt for a new director. There is also the issue of how much of a role the CEO should play in board succession. This can be a problem if the relationship between the CEO and the board or the chair is too close. The CEO is after all accountable to the board, so it is questionable whether CEOs should interview or sign off over board appointments. Conversely, it is important that a director meet the CEO and potentially other senior executives when they do their due diligence for a board appointment. The purpose of this meeting should be made clear to all participants. Board numbers With the push for increasing diversity and a broader range of skills on boards, there arises the question of how many board members are needed to meet these criteria. The board needs the right number of members to give it options for the various board committees and for the eventual appointment of a new chair. Six to nine members is usually a good starting point. More is being asked of directors as well. Ten to 15 years ago a director would probably have committed about 20 days a year to each ASX- 100 board they served on. Now it s more like double or triple that amount of time. This obviously limits the number of boards a single director can sit on and potentially limits the pool of qualified and experienced directors. BOARD SUCCESSION PLANNING AND COMPOSITION 6
The Australian Institute of Company Directors is committed to excellence in governance. We make a positive impact on society and the economy through governance education, director development and advocacy. Our membership of more than 37,000 includes directors and senior leaders from business, government and the not-for-profit sectors. Disclaimer Copyright in this material is owned by AICD unless otherwise noted. All rights are strictly reserved under Australian copyright law and comparable law of other countries. You may not reproduce any part of the material without AICD s prior written consent. 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 views and opinions expressed in the material are not necessarily the views or opinions of AICD, or its members, directors or employees. 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. 2015 Australian Institute of Company Directors. All rights reserved. BOARD SUCCESSION PLANNING AND COMPOSITION 7
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