In August 2021, Egon Zehnder convened once again for its ongoing Corporate Governance Exchange (CGX) in India. CGX is an event series that brings together respected non-executive directors some of whom are also Chairpersons of their companies or Nomination and Remuneration committee Chairs on other boards. This session welcomed 14 board members virtually, in addition to Egon Zehnder Chair Jill Ader, as well as Partners Sonny Iqbal and Namrita Jhangiani.
Our guest speaker, on the topic of Nominations and Leadership Transition, was Zein Abdalla, former President of PepsiCo Inc, and current Chair of the Mastercard Foundation, where he also chairs the Nomination and Governance Committee. What follows are some key takeaways from an engaging discussion on the future of cultivating and transitioning leaders, from CEOs to board members.
Ongoing Feedback Versus Annual Assessments of Leadership
How objectively do we really understand how a CEO is performing? We explored this question in detail and generally agreed that the usual box-ticking style of annual leadership evaluations is increasingly insufficient. Such assessments tend to have minimal impact on reforming undesirable practices and can be anticipated by CEOs merely as an opportunity to go on the defensive.
A possible solution for this would be to leverage the unique, and often personal relationships that CEOs have and develop with board members to establish an environment of ongoing feedback. This can allow CEOs to internalize constructive criticism from their peers over time, and without feeling backed into a corner once or twice a year in the form of a sprawling, formal critique.
Promoting Self-Awareness in Leaders
Among the shifting expectations for executive leadership is an enhanced demonstration of self-awareness, and a consensus on this point drove much of the discussion on how future CEOs should be chosen and evaluated throughout their time with an organization. More specifically, the speakers established how a lack of self-awareness in CEOs can result in ego-driven decision making, and an overall attitude of irreplaceability that can cloud their capacity to recognize the appropriate timing for a transition/succession.
This need for self-awareness, according to Abdalla, also extends to the board members, whose interactions with and understanding of company culture are critical to how effectively leadership is evaluated and transitioned.
Having Difficult and Timely Conversations
To further expand on the first point, creating an environment of ongoing feedback doesn’t eliminate the need for leaders to be confronted with difficult topics related to their job performance. For this solution to be effective, board and NRC members need to be willing to have tough conversations with their CEOs on a regular basis. And again, these conversations need to happen in a way that doesn't make the recipients feel unsafe or insecure in their positions.
In addressing this challenge, one common approach among our attendees was to ensure that tough conversations were taking place in a one-on-one format, and in the context of a relationship founded on trust and mutual respect. Such a relationship is often observed between the chairperson and the CEO and it can be tremendously beneficial for this purpose. Moreover, when the relationship is characterized by an ongoing dialogue that also includes positive and neutral feedback, the more difficult topics tend to feel less formal and ultimately less confrontational.
Beyond performance assessments, we also touched briefly on the need to leverage these relationships to make CEOs more comfortable with the idea of their succession. This is critical because if done effectively, it can save an organization a great deal of trouble in transitioning leadership by allowing them to plan for a succession years in advance, and ideally during a period of peak performance rather than operational hardship.
Succession Should be Based on Objective Evaluations, Whether External or Internal
While there was some debate over whether external evaluations might be preferable over internal when it comes to objectivity, the consensus reached was that evaluators should simply be effective, and their assessments based on competency, relevance, and how the candidate suits the overall requirements of the company. Further, and circling back to an emphasis on company culture that permeated most of our discussion, board members need to establish more foundational, objective principles for performance that go beyond their personal relationships. What is the company's culture truly all about? And rather than conceiving of a list of desirable outcomes, can the board decide on a single, non-negotiable principle that reflects the company mission in addition to narrowing the criteria for assessment?
Board Refreshment Best Practices
Finally, our discussion took an unplanned and highly engaging detour into the realm of board refreshment, more specifically how often, and on what basis, should board members be replaced. Some concerns have recently been raised about long-serving board members, and the possibility of seats remaining occupied not necessarily on the basis of added value, but as a result of the politics of unchallenged board member networks or “old boys clubs.”
Because company needs are shifting so rapidly to reflect novel cultural expectations and markets, it's critical that board members are being evaluated on the principles that can benefit these new objectives. It’s what we do in the process of seeking CEOs: clearly articulating the critical experiences and skill profiles we need and filling the position based on that specific criteria. This isn’t always the case when it comes to board members, who often remain seated as a result of long-tenure agreements, regardless of whether their expertise is still applicable in the context of the most current and relevant objectives.
But at the same time, establishing shorter term-limits for board members can have its pitfalls, and increasing the frequency with which board members are formally evaluated could potentially create barriers to a company's progress. Ultimately, we do need some sense of continuity on the board, but we also need refreshment, and it’s about figuring out how to strike that delicate balance. It’s a complex problem that unfortunately lacks a single solution, but is a topic that Egon Zehnder hopes to explore in more depth at future events.