Looking Beyond Shareholder Approval
How robust is your board’s director succession planning?
Proxy season, with its voting on director slates, shines a bright light on board composition—an aspect of governance that has come under increasing scrutiny from investors, directors and other observers. But the slate is only the end result of a director succession process that has become more and more complex and competitive. Nominating committees should not make the mistake of thinking that just because their slate wins shareholder approval that their underlying succession plan is adequate for the demands of the current boardroom environment.
To see why this is so, it is important to understand two significant ways in which the director talent pool has changed in the past decade. First, nominating committees no longer are just competing against other nominating committees—they’re also competing against activist investors, who are emerging as players in the director candidate marketplace. Assembling slates that will support the activist’s agenda and also garner support from other shareholders is an activist’s most formidable weapon. So they don’t wait for an opening provided by a company’s poor performance to start cultivating relationships with potential board members.
Second, the current business environment, shaped by disruption, digitalization, innovation and other dramatic forces, is causing many companies to take a hard look at their approach to director succession and tenure. Nominating committees are concluding that the cadence of director turnover needs to be more actively managed so that the board’s collective experiences and perspectives remain in sync with the pace and extent of change. As a result, forward-thinking nominating committees are being more proactive in grooming potential director candidates, and doing so sooner and outside the pool of usual suspects. So it is that, according to a study by the Investor Responsibility Research Center Institute and Institutional Shareholder Services, average director tenure on S&P 1500 boards has dipped in the last several years while the nomination of new directors has accelerated. (We discuss the mechanics of an “evergreen” approach to director succession in the September/ October 2016 issue of The Corporate Board.)
These two factors mean that those boards that still wait until a director announces his or her retirement plans before identifying and connecting with potential replacements are at a significant disadvantage. They have lost the luxury of time that is needed to think deeply about their composition strategy and expand their recruitment networks. With the clock ticking, they naturally turn to the cohort of current and retired CEOs and other established board members. If all goes well, the seat will be filled and shareholder approval won. But the board will not be strengthened as a strategic resource and activist investors will sense a weakness to exploit in the future.
In the not-too-recent past, that task of composing a director slate attracted little scrutiny from shareholders or the rest of the corporate governance community. Today, however, the bar has been raised significantly, and companies can no longer afford to peg director succession planning to a “season” or an annual event. The impact of the board on the fortunes of the company never stops, and search for director talent shouldn’t either.