A2 Board Responsibilities & CEO Succession

James Beck

2011ANNU

AL

CONFERENCE

28TH ANNUAL

CONFERENCE

2011

2

Today’s topic

• The board’s role in CEO succession planning including– Level of involvement– Issues in CEO succession– Principles of CEO succession

• The link with strategy

ORGANISATIONAL ENVIRONMENT

THE BOARD ENVIRONMENT

BOARD INTELLECTUAL CAPITAL

Board Competencies

• Knowledge• Skills• Abilities• Contacts

Board Structures

• Policies• Processes• Procedures• Committees

BoardDynamics

Board Behaviours

• Personality• Values• Norms• Board-

management relations

BOARD ROLES

Monitoring

Risk Management

Compliance

Policy Framework

Networking

Stakeholder Communication

Effective Governance

CEO Selection, Monitoring and Evaluation

Strategy

Decision Making

ORGANISATIONAL PERFORMANCE

WORK WITH AND THROUGH THE CEO AND SMT

Adapted from Nicholson & Kiel, 2004

INPUTS

Organisation Type

History

Legal Framework

Constitution

Strategy

High performance board framework

CEO Role of the Board

SUCCESSION

DESELECTION

MENTORINGEVALUATION

SELECTION REMUNERATION

CEO role of the board

Stages of Board Governance Maturity

A board at this stage is leading practice in this area.5. Leading practice

The board has learned through experience which changes have worked and which have not worked.

4. Continuous learning

The board has resolved to improve performance in this area throughout the entire organisation.3. Consistent

The board understands the importance of the particular area and has taken initial steps to improve its performance.2. Developing

The board has little understanding of a particular area of governance practice or of its importance.1. Baseline

Stage1

Baseline2

Developing3

Consistent4

Continuous learning5

Leading practice

Key area: CEO evaluation

CEO evaluation does not occur.

An informal CEO evaluation occurs annually. There are no mid-term or periodic reviews of the CEO’s progress.

A formal CEO evaluation occurs annually.There are no mid-term or periodic reviews of the CEO’s progress.

A formal annual CEO evaluation occurs annually.Mid-term and periodic reviews of the CEO’s progress are being trialled.

A formal annual CEO evaluation occurs annually.Mid-term and periodic reviews of the CEO’s progress take place.

Performance concerns are not addressed by the board.

Unsatisfactory performance is addressed by the board. There is no formal annual performance exchange between the CEO and the board.

Unsatisfactory performance is addressed by the board. An informal annual performance exchange occurs between the CEO and the remuneration committee.

Unsatisfactory performance is addressed by the board. A formal annual performance exchange between the CEO and the full board is being trialled.

Unsatisfactory performance is addressed by the board. A formal annual performance exchange occurs between the CEO and the full board.The Chair provides regular informal feedback to the CEO.

The majority of the following documents do not exist: CEO evaluation policy; CEO evaluation procedures; CEO’s position description; CEO’s performance agreement; and organisational values.

Some CEO evaluation policies and procedures are documented but are out of date.

Existing CEO evaluation policies and procedures are being updated and missing policies and procedures are in course of development.

An updated suite of CEO evaluation policies and procedures is being trialled.

CEO evaluation policies and procedures are fully documented, updated as required and reviewed at least annually.

Board Governance Maturity Model: CEO Evaluation

The Role of the Board in CEO Succession

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What the experts say...

Most large companies say they do succession planning, but if they do it at all

they don’t do it very well. Boards themselves don’t put enough effort into seeing

that internally senior management are developed and that externally there’s a

good search for external talent in time to find it.

Professor Thomas Clarke, UTS Centre for Corporate Governance

When I work with boards on CEO succession planning, I am shocked at how often I find that their emergency plan consists of little more than a list of high-potential internal candidates and a telephone tree of ‘who calls who’ if a crisis breaks.

Beverly Behan, principal of Board Advisor LLC

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Roles are evolving

Past•CEO leads and decides•Board agrees

Present•Board and CEO collaborate•Board approves

Future•Board leads and decides•CEO provides input

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Board involvement

MinimalComplete Control

Collaborative

Boards will differ in the degree of their involvement in CEO succession planning.

Board drives the process in close collaboration with the current CEO

Board controls the process with little or no input from the current CEO

CEO controls the process with little or no input from the board

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Rational

EmotionalPolitical

The Rational/Analytical Component• Identifying job requirements based

on company strategy• Searching diligently for the best

candidate• Assessing candidates using

multiple methods and raters• Selecting the best candidate

regardless of personal loyalties

Issues in CEO succession

Political• Dealing with factions

within the board• Avoiding destructive

internal politics• Balancing the needs of

external stakeholders

Emotional• Coping with personal emotions• Helping those not selected adjust• Creating support for the new CEO• Moving on

Source: Nadler, Krupp, & Hossack, 2009

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Key types of CEO succession• Tournament/contest

– Top executives are pitted against outsiders for the position• Relay

– Heir apparent works with the incumbent CEO• Horse race

– Two or more top executives compete for the CEO post• Coup d’etat

– A coalition of board members mounts enough force to unseat the incumbent CEO

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Internal vs. external

Internal

• Greater likelihood to maintain current strategic vision• Leads to homogeneous groups because of similarity in

past experience and organisation tenure – More cohesive– Communicate more frequently– High level of integration

• More likely to follow in predecessor’s footsteps

External

• Greater likelihood to experience significant strategic change

– Recommended when significant change is needed• Leads to more heterogeneous work group

– Challenge existing viewpoints– More solutions

• Represents raw power base because of few ties to old system

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Danger!

• External appointments can disappoint potential internal candidates

Keeping the talent pool filled

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Organisational Talent Pool

Leadership PlanningProactively developing and deploying

leadership talent

Continuity PlanningPreventing expertise and knowledge loss that would reduce performance

Succession PlanningProactively assessing and satisfying

organisational needs

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New CEO Appointed

Establish Criteria for Next CEO

Identify / Recruit Candidates

Continual Candidate Review and Development

Designate Transition Plan to

CEOCEO

Succession Process

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5 principles of CEO succession

1. The goal of CEO succession is finding the right leader at the right time.

2. CEO succession is a board-driven, collaborative process.3. CEO succession is a continuous process.4. The board should ensure that the CEO builds a talent-rich

organization by attracting and developing the right people.5. Succession planning should be driven by corporate strategy.

Source: NACD, 1998

Strategy and Succession

The Right CEO

Good listener

EmpathySense of humour

Flexibility

Generosity

Open-mindedness Intelligence

Humility

Inclusiveness

Integrity

If you don’t know where you are going, any CEO will get you there

Experience

Knowledge

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Strategy drives succession• Before considering any particular candidate to succeed the current CEO, the board

should understand the strategic context in which the next CEO will have to operate, i.e.

– Key business drivers;

– Industry trends;

– Competitive landscape;

– Markets; and

– Goals (both financial and non-financial).

• Then it is possible to define the competencies that the next CEO will need

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Firing the CEO?Often a board does not understand their company’s strategy well enough to make an informed CEO selection

Boards need to: • Allow strategic needs, not the market to dictate any selection

process• Appropriately support CEOs by:

– setting realistic performance expectations; and – supporting the CEO in communicating realistic earnings

forecasts and “bad news”• Provide more strategic oversight • Provide the CEO with more appropriate feedback on his or her

strategic performance

Planning for the Event

Preparing for a smooth transition

Recognise that it is the board’s responsibility

Engage the CEO as an ally in succession planning

Make succession planning part of strategic planning

Have an emergency transition plan

Include board development and transition issues in succession planning

Emergency transition plan• Who will take the CEO’s place?

• Who will handle the work of the person(s) filling in for the CEO?

• How much authority will the interim CEO have?

• If that authority will be more limited than that of the former CEO, what controls will be put in place?

• Who needs to be informed and how and when will each relevant party be notified?

• Who is authorised to speak on behalf of the organisation?

• At what point, and how, will the board initiate a formal search for a new CEO?

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ThankYou

If you have any questions about today’s topic or any other organisational matters, feel free to contact James Beck or Judith Winn at Effective Governance:

James.Beck@effectivegovernance.com.au

Judith.Winn@effectivegovernance.com.au

Phone: 07 3510 8111

AppendixSuccession Planning Checklist

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Board CEO Succession Planning Checklist

• Do board members support the current mission statement?

• Do the board and the CEO have a collective vision of how the organisation should be evolving?

• Does the work of the board and employees reflect defined strategic direction and goals?

• Does the board have a clear understanding of the financial condition of the organisation?

• Is there a current and adequate written job description that clearly spells out the responsibilities of the CEO?

• Is there a climate of mutual trust and respect between the board and the CEO?

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Board Checklist (cont’d)• Do board members understand their roles and responsibilities?

• Is there agreement between the board and the CEO on their respective roles and mutual expectations?

• Does the board have a constructive process for reviewing the CEO’s performance and remuneration package on a regular basis?

• Does the board have a regular and effective process for assessing its own performance?

• Does the board have in place emergency management transition policies if the CEO departed suddenly?