Board composition and succession planning are critical to help position companies for the future. Aligning boardroom talent with the company’s strategy is driving the thinking behind board composition and succession planning for many boards and companies today. Investors, regulators and media scrutiny are also sharpening the focus on boardroom skills, diversity, composition and director tenure. But what are the key elements for success and what potential challenges do directors have to address?
To better understand the tools and approaches that directors are using to achieve the right mix of skills, backgrounds, experiences and perspectives in the boardroom, consulting firm KPMG surveyed more than 2,300 directors and senior executives around the world, including 71 senior executives from India. They discussed how their boards approach composition, what potential “blind spots” boards may need to address, and how they think about refreshment and diversity in terms of building strong boards.
According to the KPMG survey, Building a great board, conducted by KPMG’s Audit Committee Institutes, close to three-quarters of board directors believe that a chief concern for them is to align boardroom talent with evolving short-term and long-term strategy. There is an intense focus on the board composition, given that it requires greater diversity in perspectives and expertise, an understanding of the competitive and disruptive environment and dynamic technology trends.
“It is imperative to have a board with the right mix of people as it ensures the company and its people grow holistically. A diverse mix of viewpoints and backgrounds also enhances multifaceted, collaborative plans for short and long-term growth, setting the company up for success. A board room needs to be as dynamic as the environment outside”, said Mritunjay Kapur, head of risk consulting, KPMG in India. “A successful board will change proactively and disrupt itself, before a competitor forces disruption upon it.”
Close to 44% of the Indian respondents said that they see room for improvement when it comes to the board’s overall ability to probe management strategic assumptions and help the company navigate an increasingly volatile and fast-paced global environment. In comparison with 36% globally, 41% of Indian respondents said they are satisfied with board compositions and abilities to steer the company in the right direction.
Here are the key Indian trends according to the survey:
1) Board composition—and alignment with strategy—is a key priority. Identifying board gaps in relation to the company strategy is the top concern for most directors. This is attributed to the demanding forces of competition and continuous disruption. A deep understanding of the environment to be able to align the future strategy, diversity in viewpoints, experiences and skill sets contribute to better decisions for the company. Seasoned business experience and an understanding of changing technology is a key challenge.
2) Significant barriers exist to building a high-performing board. The barrier most frequently cited by survey respondents in India was “finding directors with both general business experience and specific expertise needed by the company” (70%). Resistance to change due to “status quo” ranked second (61%), followed by identifying the talent the board will need in 3-5 years (49%).
3) Despite the widely known importance of succession planning in achieving optimal board composition, most boards lack a formal succession plan or have not even had a robust discussion to put the process in place. Only 7% of Indian boards had a formal succession plan that is aligned with future needs and is periodically reviewed. While 41% of Indian boards had discussed future succession plans, it was only on an informal basis or when the need for a new board member arises.
4) There are important mechanisms to help maintain optimal board composition, but they are often underutilized. Respondents overwhelmingly cite robust board evaluations (86%) and formal succession plans (77%) as the most effective mechanisms to achieve the right board composition. However, as noted above, few boards have formal succession plans in place, and nearly one-quarter cite “lack of robust board and individual director evaluations” and “difficulty in removing underperforming directors” as among the greatest barriers to building and maintaining a high-performing board.