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Board Succession Requires Refreshing Plan

Author: Karl Simpson, Liftstream

Succession planning should concern every board of directors, irrespective of whether private or public. Increasingly, public company shareholders and representative organisations such as ISS or Glass Lewis are scrutinising the degree to which succession plans for board members and critical executive positions are detailed and disclosed by nomination committees as to ensure good governance. Very few companies invest adequate time and resource to succession planning as a matter of good governance. The preponderance of planning centred on the CEO, whereas issues like board tenures, turnover rates, board performance and experience composition at the board are greatly overlooked, let alone planned appropriately.

This need for succession planning feeds into the broader need to ‘refresh’ your board, one feature of which is to bring greater diversity to the board; race, gender, age or otherwise. Improving diversity is a central theme of the succession plan, making sure that a board or executive replacement process is comprehensive in the search for diverse candidates, with gender representation receiving attention from stakeholders, owing to the current imbalance.

Board Refreshment Focused on Diversity

In the UK, there has been a voluntary approach to increasing the representation of women on the boards of UK companies, with FTSE 100 now having 26.1% women appointed to board positions, dropping to 21.9% among the FTSE 350, where there remain 15 companies with all-male boards. This gradation relative to company size is also evident in the US, where the difference between companies at the top and bottom of the Russell 3000 amounts to a full 3%, a figure which compares unfavourably with other leading indices, as show below (Fig.3). Companies are being made to take this issue seriously though, and not just by governments; investors too. In 2013 and 2014 there were a record number of shareholder resolutions filed on this issue in the US and these accounted for more than half of similar gender diversity related resolutions filed since 2008. So the message is clear, investors are increasingly watching what companies are doing and they are objecting if companies are not diversifying adequately. Why?…well, mainly because they are convinced by the evidence that is leads to stronger, better governed, more successful companies.

Gender Diversity - Proportion of Board Seats. (US indices) Source: ISS Quickscore
Gender Diversity – Proportion of Board Seats. (US indices) Source: ISS Quickscore

Fundamentally, leaders of all corporations must be addressing the issue of greater representation of women at all levels of their organisation, while the C-suite and Board positions naturally stand most prominent among these.

From the figures shown here, evidently the issue is being taken more seriously by the bigger companies, perhaps under greater scrutiny from all stakeholders, including their shareholder base. Smaller companies are inadequately addressing this issue and it is true of succession planning in general. Small companies are not making the appropriate plans to recruit, measure or change their boards to better serve their business. When they are choosing to act on this, they are doing so often without due-process and in a highly unstructured way.

Biotechnology’s Leadership is Female Gender Impoverished

In the biotechnology sector, there is still a very poor level of gender diversity at the board level among both private and public companies, where the landscape currently looks a bit like this:

  • 1 in 10 board directors is a woman
  • 1 in 5 executive leaders is a woman
  • Over 50% of biotech companies have all-male boards
  • 9% of VC Partners are women
  • 5% of VC financing goes to companies run by women CEOs
  • 7% of biotech companies are run by women CEOs

Part of the challenge here is of course the capital intensive nature of the biotech sector demands substantial financing and the presence of investors such as venture capital. This means that the board is heavily stacked with venture partners, a community where only 9% are women. The introduction of independents to the boards of directors while private is difficult, given the independents are not writing the cheques and usually there are multiple investors in any given venture who want to influence strategy through the board. There are commonly difficult board dynamics among VC funded business, thereby encouraging a tendency for VC syndication with familiar co-investors who are highly constructive fellow board members. Irrespective of which investor groups invest, the board constituents are likely to mirror the investor demographics and these are presently male dominated.

An IPO provides the liquidity event for investors to exit a company and also hands the company’s board the chance to plan suitable succession of the board directors to achieve a far more independent board that is fit for purpose in governing the public company. These liquidity events have been occurring with high frequency since 2012, as the chart shows.

US Biotech IPO Data - 2014 - Source: Renaissance Capital
US Biotech IPO Data – 2014 – Source: Renaissance Capital

However, our research up to 2014 shows that there is almost no difference between the board of directors of private and public companies, with regards to the representation of women. There are reasons which could begin to partly explain this, such as lock up periods for investors and also VCs wanting to retain their equity position in the business towards a greater value inflection, thereby holding onto their board seats. But this is surely not true across the entire asset class and seeing some movement in the diversification of boards should surely be evident.

US Female Biotech Leadership; Private v Public (2014)
US Female Biotech Leadership; Private v Public (2014)

In arriving at this data analysis, we also concluded through qualitative study that the lack of process and structure applied to recruit new board members and key executives among small biotechnology companies was a major contributor to the poor representation of women on boards and in the key executive roles.

As one executive told us: I am observing some very interesting dynamics in the biotech world of small companies. Networks / sponsorship really matter. Candidates are identified through word of mouth … formal search process takes second place and there is far less discipline in the review of candidates and the BODs are really not held accountable by anyone for diversity. Thus like selects like… and women are clearly in my experience being held to much higher standards.”

Implicit from this evidence is that creating gender equality in business, or even the more aspirational gender equity, would require corporations to culturally transform. But many consider the coverage of gender diversity in the boardroom as inordinate, yet, proponents believe by changing the gender composition of the boardroom and executive suite you catalyse a sequence of reactions that precipitate gender equality throughout the workplace structure. The evidence would seem to support this thesis.

Discovering your Pipeline Prospects

One of the greatest impediments to progress in righting the current imbalance is dealing with the perception by the incumbent leadership that simply no pipeline of credible candidates exists for them to appoint. But is this true?

Well, maybe, but unlikely. The reason I say ‘maybe’ is because there are always shortages of talent when you set about finding complex and experienced skill sets, this pipeline poverty is indiscriminate of gender. The argument of candidate pipeline shortages, relative to gender, has many weaknesses. The most obvious of which is that you have not looked widely enough to attract a diverse group from which to select. Furthermore, people are inclined to conduct very immediate searches of their own personal networks to form a picture of the potential candidate pools, a process of recall which is likely to demonstrate natural gender bias based on our educational, working, social and even sporting affiliations. Also, perhaps the way in which a job profile unintentionally, but also unnecessarily, excludes certain candidates, whereas a more considered criteria would widen the field while still acquiring the requisite competence.

It is this last point which creates much debate, the idea that in some way the system becomes skewed towards arbitrarily applied, self-imposed quotas, where the aim is simply to diversify and not somehow achieve the best hire. That is some way the standard of hiring gets diluted. In over a decade of addressing this issue, I have never spoken to a woman who wants the job simply because she is a woman, and not because her future employer and colleagues value her experience above all others relative to the role.

And so in trying to achieve diverse, gender equal recruiting, you have to forensically analyse the myriad of talent sources to find the experience or potential your company requires.

Chairs, CEOs and Nomination Committees need to Act

Large and mid-cap corporations on both sides of the Atlantic are being shaken awake to the gender diversity issue at the top of organisations. The mounting body of evidence and consensus building behind the premise that diversity leads to ‘better business’ is indeed leading to acceleration in the introduction of women into the boardrooms of the biggest companies. Effective nomination committees are looking towards diversity with real purposeful intent and this is shown by the number of women being nominated to board director posts, exceeding 25% for the first time among the S&P 500 (fig 8.) and the 26% seen among FTSE 100.

Gender Diversity - Proportion of New Nominees (US indices). Source: ISS Quickscore

Gender Diversity – Proportion of New Nominees (US indices). Source: ISS Quickscore

However we’re not seeing a convergence trend in the data between large and small companies, in fact the opposite, which we partly attribute to the underlying weakness in structuring a disciplined appointments process among small-caps. These Chairman, CEOs and nomination committees are falling short of their governance responsibility to produce effective plans that ensure the company’s sustainability is optimised through a continuous provision of candidates able to fulfill board director and executive positions and which represent an appropriate mix of diverse experience and skills. Instead, a high prevalence of reactive, poorly conceived hiring, with an over-reliance on personal networks, is failing to deliver the continuous identification, evaluation, development and preparation of diverse candidates for these senior appointments.

Attend our FREE Leadership Event on December 3rd at Biogen, Cambridge, MASS. – Women Executives: Stepping Up to the C-suite and Board 

 

 

 

Posted in Board Director Appointments, Corporate Governance, Executive Appointments, Recruitment Market, Workplace Diversity | Tagged , , , , , , , , , , , , , , , , , , , , | Leave a comment




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