A2 Board Responsibilities & CEO Succession James Beck

1. 2011Annual Conference 28THANNUAL CONFERENCE2011 A2 Board Responsibilities & CEO Succession James Beck

2. Today’s topic • The board’s role in CEO succession planning including • Level of involvement • Issues in CEO succession • Principles of CEO succession • The link with strategy

3. High performance board framework ORGANISATIONAL ENVIRONMENT INPUTS THE BOARD ENVIRONMENT Organisation Type BOARD INTELLECTUAL CAPITAL BOARD ROLES Board Behaviours Board Competencies Strategy Board Dynamics CEO Selection, Monitoring and Evaluation Legal Framework • Personality • Values • Norms • Board-management relations • Knowledge • Skills • Abilities • Contacts Monitoring Risk Management Constitution Compliance Policy Framework Board Structures Networking Strategy Stakeholder Communication • Policies • Processes • Procedures • Committees Decision Making Effective Governance History WORK WITH AND THROUGH THE CEO AND SMT ORGANISATIONAL PERFORMANCE Adapted from Nicholson & Kiel, 2004

4. CEO Role of the Board

5. CEO role of the board SELECTION REMUNERATION DESELECTION EVALUATION MENTORING SUCCESSION

6. Stages of Board Governance Maturity A board at this stage is leading practice in this area. • The board has learned through experience which changes have worked and which have not worked. The board has resolved to improve performance in this area throughout the entire organisation. The board understands the importance of the particular area and has taken initial steps to improve its performance. The board has little understanding of a particular area of governance practice or of its importance. 5. Leading practice 4. Continuous learning 3. Consistent 2. Developing 1. Baseline

7. Board Governance Maturity Model: CEO Evaluation

8. The Role of the Board in CEO Succession

9. What the experts say... When I work with boards on CEO succession planning, I am shocked at how often I find that their emergency plan consists of little more than a list of high-potential internal candidates and a telephone tree of ‘who calls who’ if a crisis breaks. Beverly Behan, principal of Board Advisor LLC Most large companies say they do succession planning, but if they do it at all they don’t do it very well. Boards themselves don’t put enough effort into seeing that internally senior management are developed and that externally there’s a good search for external talent in time to find it. Professor Thomas Clarke, UTS Centre for Corporate Governance

10. Roles are evolving

11. Board involvement Boards will differ in the degree of their involvement in CEO succession planning. Complete Control Minimal Collaborative CEO controls the process with little or no input from the board Board drives the process in close collaboration with the current CEO Board controls the process with little or no input from the current CEO

12. Issues in CEO succession • The Rational/Analytical Component • Identifying job requirements based on company strategy • Searching diligently for the best candidate • Assessing candidates using multiple methods and raters • Selecting the best candidate regardless of personal loyalties • Political • Dealing with factions within the board • Avoiding destructive internal politics • Balancing the needs of external stakeholders • Emotional • Coping with personal emotions • Helping those not selected adjust • Creating support for the new CEO • Moving on Source: Nadler, Krupp, & Hossack, 2009

13. Key types of CEO succession • Tournament/contest • Top executives are pitted against outsiders for the position • Relay • Heir apparent works with the incumbent CEO • Horserace • Two or more top executives compete for the CEO post • Coupd’etat • A coalition of board members mounts enough force to unseat the incumbent CEO

14. Internal vs. external

15. Danger! • External appointments can disappoint potential internal candidates

16. Keeping the talent pool filled Organisational Talent Pool Leadership Planning Proactively developing and deploying leadership talent Succession Planning Proactively assessing and satisfying organisational needs Continuity Planning Preventing expertise and knowledge loss that would reduce performance

17. CEO Succession Process

18. 5 principles of CEO succession • The goal of CEO succession is finding the right leader at the right time. • CEO succession is a board-driven, collaborative process. • CEO succession is a continuous process. • The board should ensure that the CEO builds a talent-rich organization by attracting and developing the right people. • Succession planning should be driven by corporate strategy. Source: NACD, 1998

19. Strategy and Succession

20. If you don’t know where you are going, any CEO will get you there The Right CEO Inclusiveness Intelligence Open-mindedness Knowledge Generosity Experience Flexibility Good listener Sense of humour Empathy Humility Integrity

21. Strategy drives succession • Before considering any particular candidate to succeed the current CEO, the board should understand the strategic context in which the next CEO will have to operate, i.e. • Key business drivers; • Industry trends; • Competitive landscape; • Markets; and • Goals (both financial and non-financial). • Then it is possible to define the competencies that the next CEO will need

22. Firing the CEO? Often a board does not understand their company’s strategy well enough to make an informed CEO selection Boards need to: • Allow strategic needs, not the market to dictate any selection process • Appropriately support CEOs by: • setting realistic performance expectations; and • supporting the CEO in communicating realistic earnings forecasts and “bad news” • Provide more strategic oversight • Provide the CEO with more appropriate feedback on his or her strategic performance

23. Planning for the Event

24. Preparing for a smooth transition Recognise that it is the board’s responsibility Make succession planning part of strategic planning Engage the CEO as an ally in succession planning Include board development and transition issues in succession planning Have an emergency transition plan

25. Emergency transition plan • Who will take the CEO’s place? • Who will handle the work of the person(s) filling in for the CEO? • How much authority will the interim CEO have? • If that authority will be more limited than that of the former CEO, what controls will be put in place? • Who needs to be informed and how and when will each relevant party be notified? • Who is authorised to speak on behalf of the organisation? • At what point, and how, will the board initiate a formal search for a new CEO?

26. Thank You If you have any questions about today’s topic or any other organisational matters, feel free to contact James Beck or Judith Winn at Effective Governance: James.Beck@effectivegovernance.com.au Judith.Winn@effectivegovernance.com.au Phone: 07 3510 8111

27. Appendix Succession Planning Checklist

28. Board CEO Succession Planning Checklist • Do board members support the current mission statement? • Do the board and the CEO have a collective vision of how the organisation should be evolving? • Does the work of the board and employees reflect defined strategic direction and goals? • Does the board have a clear understanding of the financial condition of the organisation? • Is there a current and adequate written job description that clearly spells out the responsibilities of the CEO? • Is there a climate of mutual trust and respect between the board and the CEO?

29. Board Checklist (cont’d) • Do board members understand their roles and responsibilities? • Is there agreement between the board and the CEO on their respective roles and mutual expectations? • Does the board have a constructive process for reviewing the CEO’s performance and remuneration package on a regular basis? • Does the board have a regular and effective process for assessing its own performance? • Does the board have in place emergency management transition policies if the CEO departed suddenly?