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Nominations Committees’ Resolutions Series: #1- Board and Executive Succession Planning Must Be Forward Looking

Succession Planning should concern the nomination committee all year round, but the ticking over of the calendar is the perfect opportunity to appraise the sophistication of your succession planning.

In late 2015, the FRC published its Guidance on Board Succession Planning as part of the UK Corporate Governance Code. While this affects only UK companies, the US-oriented Institutional Shareholder Services published a review of ‘Board Refreshment’ in 2015, which showed that board refreshment has been steadily on the rise since 2008 with 2013 and 2014 showing acceleration, as investors get more vocal about their concerns around board compositions, with tenure predominant among the challenges.

In 2014, the Society of Corporate Secretaries collected data from 250 public companies in the US. Below is a summary of the tenure composition.

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Source: The 2014 Board Practices Report by the Society of Corporate Secretaries and Governance Professionals

Boards are constantly tested by new corporate governance challenges; cyber-security, global markets compliance and social media management among the key issues. Addressing these gaps is a key part of a forward looking nomination committee, while ensuring the broader oversight requirements are met through new board appointments and future risks mitigated. Succession planning is a key responsibility of the nomination committee and managing orderly board refreshment is a dominant feature, along with having oversight of critical executive offices. The board has ultimate responsibility for succession as the governance body, so it needs to step up its engagement on this topic and make succession a central theme of its activities.

In biotechnology, the IPO calendar has been highly populated since 2012, with over 167 US-listed IPOs since 2013 and this means many new publicly listed biotech companies who have to evolve their boards, replacing existing board members (often VC investors), with more independent board members who must be adequate in number to fulfil the responsibilities of the various committees required for governance. The Nasdaq stipulates that members of the nomination committee, or those fulfilling this board function should a committee not be formed, must be fully independent with the expiration of the first year from listing. Some will begin this rotation ahead of a listing in an attempt to show its commitment to governance, other companies might be tempted to overhaul these board structures rapidly, but a board is a team and it needs careful planning to rotate or replace members, ever mindful of the changing needs of the board given the companies evolving status. This succession of board directors must be effectively orchestrated by the nominations committee and should follow a well-designed process tailored to the needs of the company.

As a senior executive from one of the major European Borses recently told Liftstream: Companies frequently leave the infusion of independent non-executives, and particularly independent chairman, onto a company board before listing, far too late. They cram them in before going public and diminish the effectiveness of the board and often do so without due process. Equally, after going public, their effort to bring greater independence onto their board can be destabilising because of the speed with which it is done, causing investor tension.”

A succession plan highlights the competences, experiences, traits, and skill sets which are needed for the board to function effectively. Nomination committees should assess the capabilities and performance of current board directors, then develop specifications required for future/ potential appointments. It should also apply this rigour to the executive committee succession too.

Succession comes in different forms; predictable and unpredictable.  We have seen Valeant’s Michael Pearson placed on medical leave in early 2016 after being diagnosed with severe pneumonia, which reignites investor concerns about the troubled drugmaker and former-CFO and existing board member, Howard Schiller, steps in to fill the void. Meanwhile, rumours persist that Pearson will be ushered towards the exit-door as Valeant looks to restore confidence in the company, something their nomination committee have to manage dynamically.

In January 2016 we’ve also seen announcements of more orderly transitions of biotechnology CEOs, with Michelle Dipp of Massachusetts based Ovascience announcing her intention to step aside as CEO from July 2016, with Harald Stock a board member at the company since 2013, taking over the CEO role. Elsewhere, biotech powerhouse Celgene used the perennial JP Morgan Healthcare Conference to announce that Mark Alles will assume the CEO position effective from March 2016, stepping up from the President and COO position and succeeding Bob Hugin, who will become Executive Chairman.

The approach used by Celgene is often described as the ‘apprentice’ model, where the current CEO elevates to the position of Chairman, where they continue to effectively mentor the new CEO and other company leaders, and in such circumstances, some 92% of CEO are internally promoted. Data on CEO successions shows that in 2014, 78% of CEO successions were planned events and this maintains an upward trajectory since 2009. Looking back as far as 2006, just 44% of CEO appointments were planned, according to figures produced by PwC. There are many reasons CEOs succession fails, not least the failure of those involved to envisage the future needs of the company. However, one prime reason is that the board fails to own the responsibility, instead abdicating responsibility to the executive committee or by acting reactively, rather than embedding a suitable process.

Mapping out rotation/departure timelines as early as possible enables the board to search for eligible candidates properly and explore widely all the available options.  Meanwhile, it is worth collecting feedback from executives or board members who will step down to get a better understanding of current board composition.

Read the next building block for effective boards.

 

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