Board Succession Planning – Structuring your Board for Performance

When thinking about high-performing Boards, one thing is clear – proactive Board succession planning, and resultant Board composition, is vital to organisational performance and long-term sustainability. Each Non-Executive Director (NED) appointment is an opportunity to help shape the governance culture and long-term corporate success of an entity – so it is imperative to get this right.

Highly effective Boards are not panels of subject-matter experts. They are comprised of individuals with a depth and breadth of senior executive experience, strong strategic judgment, the ability and discipline to hold Management to account, set strategic direction, and importantly, able and willing to provide deep commercial insight. To best meet this objective, Boards must be considered in their approach to Board composition and ongoing succession planning.

We outline below some of the key areas Boards should focus on when undertaking their succession planning.

Senior Executive and Broad Business Experience, Not Specialist Skills

There continues to be considerable commentary about the need to appoint "specialists" to Boards – for example, experts in artificial intelligence, technology, data, cybersecurity, ESG, geopolitics, defence and trade policy etc.

With an average of 6.4 NEDs per ASX200 Board, giving one or more of those roles to a specialist(s) narrows the pool of NEDs on the Board who possess broad business and C-level experience, and who therefore understand what operating a business and 'good governance' look like.

The strategic, high-level view of the Board is easily compromised when NEDs are appointed specifically to fill a specialist skills gap – the presence of deep experts at the Board table risks moving from accountability and oversight (and importantly, insight) into operational territory. It is the difference between working on the business and working in it.

Rather than focusing on appointing NEDs with specialist skills, Boards should first identify skills gaps – including through periodic Board evaluations and the use of a Board skills matrix, as recommended in the ASX Corporate Governance Council Principles & Recommendations (4th Edition) (Principles and Recommendations) – then explore how best to fill those gaps. It may be appropriate, in certain circumstances, to engage expert Consultants, or establish specialist Subcommittees, who work with and advise full Committees of the Board.

Specialist expert Consultants could engage with and report to the Board / its Committees on specific projects (e.g. a billion-dollar technology / IT program); or, as part of an ongoing engagement (e.g. digital, technology, AI and cybersecurity). Boards should also look within their companies' existing Management ranks, for Executives who can play a key role in the education and ongoing development of the Board and its NEDs.

It is also critically important to understand why such skills gaps are perceived to exist in the first place. Very often, Boards are consciously or subconsciously seeking to fill skills gaps within an Executive Team. This approach, whether conscious or subconscious, is poor governance practice.

A breadth of experience should also be complemented by genuine diversity – of gender, cultural background, age, thought, and geography. The Principles and Recommendations call for measurable diversity objectives, and with good reason – diversity of perspective strengthens the collective capability of a Board and reduces the risk of groupthink.

Depth of Governance Experience

Successful Boards are composed of Directors who possess deep prior operational experience gained as senior Executives, and who have a detailed collective understanding of governance. Boards should exercise caution in appointing NEDs who do not possess practical governance experience, particularly those who are specialists with a narrow, but deep, skill set.

In short, it's about shaping the Board to be effective and add value. The ASX Corporate Governance Council advises that a Board must, "collectively, have the skills, commitment and knowledge of the entity and the industry in which it operates". It's important to note the broad (but critically important) nature of that requirement. It is the skills of the Board as a collective, not that of an individual, that are paramount.

In our experience, it takes, on average, two years before a newly appointed NED becomes effective in the Boardroom, in the sense that they meaningfully contribute to the effective discharge of a Board's obligations to shareholders. A large ASX-listed Board, with seven or more NEDs, may have the capacity to invest in a NED with limited governance experience, as that Board will likely already possess a key depth of such experience. This is not a new concept in Australia's largest listed companies.

Although it takes time for newly appointed NEDs to become effective, it is equally true that there is a point where long tenure may also carry governance risks. While long-serving NEDs bring invaluable institutional knowledge, Boards that do not proactively renew risk compromising independence and a fresh perspective that effective governance demands. A disciplined approach to Board tenure and renewal must be embedded in the succession planning framework.

Focus on Long-term Shareholder Interest

High-functioning Boards are aware that they are working for their shareholders – the owners of the Company. Concurrently, they also understand the broader stakeholder community, and the increasing societal expectations placed on them. Most Boards also know that optimal Board composition, performance, insight, and approving and monitoring Company strategy, is key to delivering long-term shareholder value.

It follows, therefore, that a Board must be satisfied that the addition of a particular individual / skill set(s) will genuinely strengthen the Board's collective capability and governance effectiveness. If this is not achieved, it is, in effect, giving a Board seat away – which may lead to suboptimal decision-making, impacting Board and Company performance.

It is also important to remain cognisant of the critical importance of the first responsibility of a Board – the appointment of the "right" CEO, and maintaining accountability and oversight of (and providing insight to) Management. This is paramount. Appointing the "wrong" CEO can quickly diminish and destroy Company value. There are many examples of Boards getting this wrong.

Natural Inquisition – the Ability to Ask the Right Questions

Good governance demands that Boards and their Directors adopt an appropriate mindset and ask the right questions. Unless prospective NEDs have prior experience in a very senior operational C-level role(s), or a regular presence in the Boardroom as an external adviser, that is a very difficult skill to obtain.

Accordingly, particular attention should be given to prospective NED candidates who have gained such executive experience in large listed or private companies. These people will have spent considerable time in the Boardroom, and seen it in action. As such, they are likely to have developed an ability to ask key questions, particularly those that are strategically important for the future of a Company.

Ultimately, it is the Board, led by its Nominations Committee, that must determine which skills are most important to it, and prioritise accordingly. Boards must be satisfied that the appointment of any NED(s) operates to improve the high-level governance of the Company. If not, it's not in the best interest of shareholders and stakeholders, and is unlikely to best position the organisation for the future.