The need for board governance is now quite widely discussed in corporate India. And while we may stand at the beginning of the learning curve for these initiatives, the level of interest and recognition of the benefits is growing. This discussion, however, would not be complete without raising the point of board succession.
This is an issue which is perhaps even less discussed, primarily since corporate boards are so preoccupied with responsibilities, such as regulatory compliance, risk assessment and executive compensation and succession planning in management, that they are unable to devote the time they would like to plan for director succession. Today, director succession is addressed only on an as-needed basis—that is, when facing an impending vacancy.
This approach, however, may put boards at a disadvantage at a time when growth and innovation are top priorities for most organizations. Facing new global and competitive challenges, companies are transforming themselves through new product strategies, different product mixes and expansion into new markets and geographies. In an ideal world, outside directors with relevant experience can serve as valuable advisers to the board and management about the company’s market, geographic and product directions and serve as a sounding board for management on the critical issues the company is likely to encounter.
Furthermore, wise boards will want to foresee where the company is headed and have individuals on the board with the expertise to help the company move in that direction as efficiently as possible. This can be accomplished by vigorously managing director succession.
Illustration: Malay Karmakar/Mint
In the UK and Europe, boards have an additional regulatory impetus for actively managing board succession. According to governance guidelines in the UK and Italy, a director’s independence is generally considered compromised if he or she has served for more than nine years from the date of first election. In France, a director is not considered independent after 12 years (three terms) on the board. Further, UK governance rules directly address board composition in the recommendation that the nominations committee evaluate the balance of skills, knowledge and experience on the board, make recommendations on the appropriate board composition and prepare a specification for each director appointment. This, coupled with scarcity of talent on the director front, ensures that companies in these countries put together well-defined board succession strategies to ensure that the quality of company boards is not compromised.
In India, board succession planning is in its infancy. On the one hand, many company board seats are conveniently filled by extended family members and on the other, even if there is a focus on including independent members, they are, more often than not, sourced through existing networks and relationships. Approaching director recruitment with the idea of expanding thought leadership on the board is very rare.
However, this will need to change—and probably will sooner rather than later. A pressing reason for becoming proactive will be the acute scarcity of experienced and available board directors. To get the right combination of general management experience, big picture view and knowledge of current business challenges is also a challenge.
Thus, as director candidate “short” lists get shorter, boards that plan for director departures will be better positioned to recruit directors with the desired experience, while boards that wait could deprive the company of a valuable board resource. External forces, too, encourage a more proactive stance on board succession planning. Institutional investors, and now private equity investors, are looking for board directors who are independent from management and possess the relevant business and financial experience.
So, what can boards do to ensure board succession planning becomes a priority?
Director departures or retirements create important and rare openings that allow the board to expand or strengthen its skills in certain areas. Boards benefit when they take advantage of this natural attrition to recruit directors who can add valuable perspectives about the company’s strategy—helping to prepare boards to rise to the new challenges and opportunities the organization will face. In addition, in many cases, director departures are well known in advance, giving the board the opportunity to plan for specific board openings.
A natural platform for the full board to review its composition and discuss the expertise that it will need in the future is the annual board evaluation. Here, individual directors and the board as a whole can identify the areas of knowledge the board should possess in the coming years based on the company’s strategic direction and the competitive landscape. From there the board can evaluate whether it currently includes individuals with the relevant backgrounds and, if not, what skills or experience would be valuable to seek in new directors when vacancies occur.
Given the scarcity in board talent, boards could start planning for vacancies at least 12 months in advance— reviewing and confirming the desired expertise and qualifications for new directors, identifying potential director candidates and communicating the board’s interest well in advance. In addition, companies should also encourage their top senior executives to join outside company boards. Not only will this add to their experience, it will broaden the overall board candidate pool.
Boards are also likely to find that regular discussions about board composition and the skill sets the board should be building for the future will help to create an atmosphere where the topic is less taboo.
Treating board succession as one of the board’s regular responsibilities may help create an atmosphere where directors themselves recognize when it may be time for them to leave to make room for individuals with much-needed experience.
Forward-looking boards will definitely elevate the task of planning for director succession. They will engage in an ongoing review of the board’s skill sets relative to the company’s strategy and direction and use director departures as opportunities to acquire the necessary capabilities and experience. As they become more proactive in this area, boards will ensure the board as a whole, and directors individually, have the energy, expertise and experience to guide the organization as it addresses new challenges and market opportunities.
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Anjali Bansal heads the India practice of Spencer Stuart, an executive search consulting firm, and is based in the firm’s Mumbai office.
This is the last in a three-part series on the board evaluation process. Click here to read the first part, Board review: an effective tool, and the second part, Context is critical to evaluations