WATSON Views

2017 brought us enough stories to last a lifetime. We witnessed the first coast-to-coast eclipse in 99 years and devastating back-to-back-to-back hurricanes. Powers shifted on the political stage – the swearing in of the 45th American President, the Paris Climate Accord, and continued instability across the globe. We raised our voices, joined the Women’s March in January, took a knee on the field and tweeted #metoo. We saw toppled regimes, monuments and moguls.

The big issues – climate change, increasing polarization of societies, changing demographics, income disparity and universal rights for all – trended across our smartphones, dominated the water cooler talk and filtered into the boardroom. Conversations changed, and so too did board focus. Disruption and geopolitical instability crept into the boardroom forcing directors to turn their attention to cybersecurity, trade, business disruption and ethics, as they found themselves governing in an increasingly complex environment.

We watched boards take a good look at the world around them and reflect on the implications for their governance – from who is around the table to how they do their work. Four boardroom game changers – board composition, peer evaluations, CEO and chair succession planning, and culture oversight – resulted in WATSON declaring People Focus as the leading governance practice in 2017.

Game Changer #1 – Board Composition

It goes without saying that the quality of individual board members underpins the board’s ability to provide leadership and effective governance. High-contributing directors not only bring needed skills and experience, but also have the characteristics and behaviours that lead to productive dialogue and good decisions. Board composition held a prominent place on many board agendas in 2017. Shareholders continued to raise their concerns about board composition and pushed for more diversity, regular turnover and directors who are current on the evolving business context. Boards themselves focused on assembling the best team possible.

Yet, despite these efforts, there is still work to be done. In a recent US-based survey, almost half of directors said a fellow board member should be replaced, and 20% went so far as to say two should be replaced. In light of only 60% of directors reporting that they adequately question management’s assumptions, investors are seeking assurance that boards challenge management on strategy and results. And while the benefits of diversity are commonly acknowledged, recent reports indicate that not enough progress has been made in this area. Women only hold 14% of corporate board seats in Canada and other dimensions of diversity are still in their infancy.

Composition should remain at the forefront of boardroom conversations in 2018. Boards need to take a long hard look in the mirror at who they need to drive the organization forward to help achieve their strategic priorities. Economic turbulence, geopolitical instability, massive business disruption – what’s on your directors’ minds? What experience and voices do you need at the table?

Game Changing Tactics

• Review and update your skills matrix on an annual basis to reflect changing needs and circumstances. Pay attention to character and behaviour, not just skills
• Round out the team – balance directors who have broad skills and experience with others who possess deeper, more specialized knowledge
• Consider the ‘younger’ demographic who typically have less board experience but may bring with them valuable skill-sets and experience in technology and cybersecurity
• Hire a search firm to help get the right people around the table (AND to help identify what you need around the table)

Game Changer #2 – Peer Evaluation

As composition changes, so too does the board’s appetite for evaluation. Institutional investors are demanding more regular director evaluation and boards are starting to respond. There is also an increasing willingness and interest amongst more progressive and senior boards towards providing candid feedback to directors. WATSON is seeing boards invest more than money when they engage in a peer evaluation process. They are investing time and a commitment to continuous improvement. Directors are taking their own evaluation seriously and appreciate the impact on both strengthened individual and board performance. To help create open, honest and transparent conversations with a goal of improved outcomes, more and more, we see organizations engaging a third party to help develop a culture of trust, objectivity and candor in director evaluations. We predict that 2018 will be the Year of the Peer in many boardrooms.

Game Changing Tactics

• Focus the conversation by drawing out themes from the feedback
• Partner with the chair to develop an action plan to improve performance
• Practice meaningful conversations on individual and board performance in camera. Make feedback part of every board meeting
• Seek feedback from management to round out director feedback
• Be bold – invite individual directors to share a specific behaviour for improvement with their peers. It can have a profound impact on board culture and contribution

Game Changer #3 – Succession Planning

Countless books and online search results illustrate the importance and impact of solid leadership on both organizations and boards. Boards have stepped up their approach to CEO and chair selection processes resulting in more robust recruitment practices. However, what some boards are still failing to realize is that succession planning is a continuous process. It doesn’t start with the first whisper of retirement nor end with the welcome party for the new CEO or chair. It is a board constant, where the means is equal to the ends. Every board needs a mechanism to ensure a solid stream of future leaders. And core to the process is the coupling of evaluation and succession planning. 2017 saw boards start to devote time and effort to building a sophisticated CEO and chair evaluation process integrated with long-term succession planning.

Game Changing Tactics

• Invest in chair succession. Take a page from CEO succession and apply similar processes and practices, including developing performance criteria for the chair
• Add “fosters a culture of feedback and learning” to your chair attributes when recruiting new chairs
• Switch up committee chairs to build a board leadership pipeline
• Lock succession planning into your forward calendar and agenda
• Focus on future leadership needs – it’s not about what is needed today but the leadership of tomorrow

Game Changer #4 – The Board and Organizational Culture

It has never been easy for boards to draw a clean line in the murky waters of culture oversight. 2017’s sexual harassment scandals, toxic tech firms and unscrupulous banking and sales tactics now make it impossible for boards to bury their heads in the culture sands. There has never been a better time for boards to dig into culture and define their role in oversight. Boards are tackling this soft issue with hard processes – clear board, committee and individual director responsibilities, policies, education and reporting. They are also setting very clear expectations of management – regular culture assessments and reporting, risk mitigation tactics, harassment policies, whistleblower avenues and recognition and reward systems that support desired company culture versus unintentionally undermining it.

Game Changing Tactics

• Draw the lines on oversight – assign committees to take responsibility for specific aspects of culture (for example task the Compensation Committee to monitor compensation and recognition systems)
• Elevate culture to the same status as strategy and risk. Monitor performance, develop policies, and recruit directors with organizational experience around culture
• Move culture up the list of CEO criteria in recruitment, succession planning and evaluation
• Go public with your shareholders and stakeholders by communicating how your board is addressing its role in cultural oversight

In a world of external complexity and disruption, it’s more important than ever to be thoughtful about who is inside the boardroom and how you carry out your board duties. Who is on the board, how boards evaluate individual performance, how they develop leadership for the future and how they define their role in cultural oversight are four forces creating a palpable shift in the boardroom. Board scrutiny was not new in 2017; stakeholders have been steadily raising expectations on board performance. However, in a world where anyone can weigh in on social media, boards need to be poised for a steady stream of citizen stakeholder questions (and, of course, comments).

As boards look ahead to 2018 and the need to provide leadership in an increasingly complex environment, we encourage you to think strategically on how best to meet this responsibility. While many important and new strategy and risk-related topics will be added to your agenda, we recommend first and foremost a continued focus on the essential role of people – ranging from ensuring the most qualified team on the board, to planning for leadership succession to gaining more meaningful insight into the organization’s culture.

So, as the year winds down, take the time to reflect on the advancements your board has made. And, as always, we encourage you to look to the future and be curious and open to new ideas. Celebrate the people around the table who together can make a difference in 2018.

From all of us at WATSON, we wish you and your board a wonderful 2018.

Vancouver BC — Elizabeth Watson is pleased to announce that John Jennings has joined WATSON to co-lead the Director and Executive Search practice, with a specific focus on expanding and strengthening WATSON’s search presence in the market place.

John brings that rare trifecta of experience to WATSON’s clients – C-suite executive, board member and executive search professional. Highly regarded by clients and candidates, John is a very welcome addition to our growing search practice.

Formerly, John was a Senior Client Partner with Korn Ferry international, a global people and organizational advisory firm, leading director and executive search assignments for clients across a wide range of sectors and functions. He has garnered a reputation amongst clients for building a strong working relationship with them, keeping stakeholders engaged and informed throughout a robust recruitment process to find the right candidate for the organization.

WATSON is the leading governance consulting and director recruitment firm based in western Canada. Based on the foundational belief that high caliber leaders and a sound approach to governance helps organizations perform better, WATSON provides governance and recruitment advice to organizations across all industry sectors. Since founding the firm in 2005, the WATSON team has helped hundreds of organizations establish and improve their approach to governance and connect value-added directors and executives.

WATSON has a solid track record of successfully recruiting CEOs, Directors, and Advisory Board members for its client base that include public companies, private companies, public sector entities and large non-profits. Other lines of business offered by WATSON include governance consulting, corporate secretary services, board and director evaluation, CEO Performance and governance education.

The mere mention of chair succession can silence even the most progressive boardroom. Uncomfortable broaching this delicate topic, many boards not only lack formal chair succession processes and policies, but in many cases, avoid the issue altogether. Today, however, we are witnessing a slow shift towards better governance. High performing boards are investing time and thought into choosing the right chair and, as they have these critical conversations, there is one word consistently rising to the top – commitment. Commitment to the importance of defining the role, commitment to establishing a robust process to identify the right future chair, commitment to transparency, and commitment to a smooth and seamless chair transition.

Boards are increasingly recognizing the value of a strong chair. The chair not only sets the tone for effective board functioning, but also plays a critical role in managing the board’s affairs, advancing the board’s agenda, liaising with the CEO, and representing the board internally and externally. The board chair’s ability to execute these responsibilities has a significant impact on the board’s relationship with management, the overall effectiveness of the board, and, ultimately, the success of the organization. Given the heightened demand for deeper experience, stronger leadership, and strategic agility, many boards are left with a dwindling list of suitable candidates. Pile on the increased time commitment and it may just seem impossible to find the right chair.

Like many aspects of governance, there is no standard practice; every board is unique, directors’ personalities are unique and a process that works in one boardroom may flop in another. Chair succession can be sensitive, particularly when an individual has been in the role for a number of years, or when a long serving director feels it is their turn. While the timing and process will be unique to every company, there is one aspect of chair succession planning that effective boards have in common – they plan for chair succession so they are ready, and when the time comes, can transition smoothly to the next leader. The board’s effectiveness depends on it; so too does the organization’s performance.

While there is no defined best practice in chair succession planning, boards who strive to govern with intention™:

• Define the role
• Design their approach
• Recruit and develop directors for leadership

1. Define the Role

What are the fundamental skills and experiences that are required of the chair at a given point in time?

Not every director has what it takes to be chair. In addition to governance experience and business-related skills and experience (knowledge of the company, the industry, the global landscape and the broader economic environment), key attributes most often sought in a board chair include: excellent communication and relationship skills, low ego, natural curiosity, understanding of group dynamics, and the ability to build consensus and bring out the best in individual directors. When identifying the skills, experience and attributes required of the role, boards need to shift their focus to the right leader for the organization at a given point in time. The right chair in the past may not be the right chair for the future, and the skills and experiences required in the current chair may be totally different than those required over the next five years.

And, while skills and experience are important, the single most important thing to look for in a potential chair is commitment. Does your candidate have the time and willingness to take on this significant role? In today’s environment, the demands of the board chair are significant and complex and will increase dramatically when major challenges arise. Be very clear on the commitment required of your chair – in the boardroom and, equally important, the time between meetings.

A word of caution: A director’s length of board service and commitment as a director should never guarantee a promotion to chair. Competency trumps tenure every time.

Tips to consider when defining the role:

• The chair role will change depending on circumstances and the company’s strategic priorities
• Annually review and update the board chair position description
• Revisit and refine the critical attributes as you get closer to transition
• Realistically map out the chair’s true required level of commitment – look beyond meetings to all the work the chair does between meetings – curating meetings, leading governance work and liaising with the CEO, committee chairs, directors and stakeholders

2. Design Your Approach

Given the growing complexity of the board chair role, and the relative scarcity of individuals who have the experience, personal attributes, and time to take on the role, boards need to be thoughtful and focused in their approach to chair succession.

a) Assign Responsibility

Who is responsible for overseeing the chair succession planning process? Who leads the transition?

Whether board chair succession comes up on a planned or unplanned basis, it’s important to be clear on who is responsible to lead the planning and transition process. In most cases the governance committee chair or the entire governance committee takes on this critical responsibility.

A word of caution: If the director leading the transition is a chair contender, appoint a director with the interpersonal skills to step in and lead the process.

b) Define the Timeline

When does the board chair term end? When should transition planning start?

Start your succession planning approximately 12 to 24 months in advance of the anticipated transition to provide adequate time to review and refresh the position description, map out the process, canvass board members, make the selection and facilitate a smooth transition.

If your board doesn’t have term limits, keep an open and regular dialogue with the board chair to ascertain their interest and plans, and adjust the timing to accommodate company circumstances (e.g., CEO transition).

c) Define the Process

How will the new chair be selected? What are the expected roles of the governance committee, directors, the incumbent chair and CEO in the process?

• Determine the decision-making process ahead of time. When it comes to determining who the preferred candidate is, establish a process that has been agreed upon ahead of time, before personalities become involved. Different selection options include: consensus, recommendation or election.
• Document the processes and policies. Develop a formal board chair succession policy and chair position description outlining the chair’s responsibilities, plus the desirable attributes and skills that the future chair should have.
• Set the rules. Avoid a popularity contest by establishing rules limiting directors campaigning for office.
• Ensure objectivity in managing the process. Typically, the governance committee will manage chair succession planning. In the case of a conflict of interest, transfer responsibility to an individual (or committee) not personally interested in assuming the role or seek unbiased external support.
• Commit to transparency. Start by embedding the process in your forward calendar to take some of the awkwardness out of the conversation; when directors see it coming, they tend to be more receptive to discussing the topic.
• Determine how the CEO will be involved. Responsibility for choosing the board chair lies squarely with the directors and the CEO should not play a role in the ultimate decision. However, given the importance of a strong, positive working relationship between the board chair and CEO, many boards invite the CEO to provide feedback on potential chair candidates and take the feedback into consideration in making their decision.
• Engage stakeholders. Typically, shareholders and stakeholders are not engaged in the board chair selection process. However, there may be circumstances (e.g., a small number of large shareholders) where the board may wish to elicit feedback on key criteria from stakeholders’ perspectives. Also, the board may wish to engage in an explicit approach to communicating the choice of a new chair to shareholders and/or stakeholders. This is an area that requires careful consideration, so as not to create expectations.
• Proceed in a timely manner. Once the board chair announces that they intend to step down, or as the final term is coming to a close, those who are interested in the position may, consciously or unconsciously, jockey for the role. This can be a death sentence for overall board dynamics. Once the transition process has started, complete the process as quickly as possible (e.g., within a few months).

d) Plan for Emergency Succession

Who will step in on an interim basis?

As with CEO succession, the board must be prepared to manage a smooth chair transition in the event of an emergency departure of the chair. Be intentional about your approach and build this into the succession policy – whether to appoint an interim chair pending the choice of a new chair, or go through the full process to transition to a permanent chair. When choosing the interim chair option, engage the entire board to discuss the key criteria of an interim chair and, if possible, be explicit about who will step in. This provides continuity internally in the organization and externally with stakeholders.

3. Recruit and Develop Directors for Leadership

Today, it is considered good practice to develop and recruit from current directors – they know the board and company well, have established relationships, and should be able to provide a seamless transition.

a) Prepare Directors for Board Leadership

There are many opportunities to help high potential directors prepare for board leadership.

Tips on how to integrate chair succession with board renewal:

• Proactively develop multiple future chairs
• Appoint potential chair candidates to committee leadership positions and, if appropriate based on their background, rotate them among committees
• Invite chair candidates to serve on the CEO search committee or other special committees in order to build important relationships or gain in depth knowledge in key areas
• Invest in external training for candidates to allow for a smooth transition to board leadership
• Mine peer evaluation results to identify and develop potential future chairs

b) Recruit from Current Directors

Transparency is crucial during chair selection. The board should commit to an open and fair process. Each director should be offered the opportunity to express their interest in the position and to consider whom they would support in the position.

Many companies integrate chair succession planning into overall board succession planning. Annually, the governance committee should review the board membership to identify multiple chair successor candidates. In the case of new director recruitment, the nominating committee should factor the board’s future leadership needs into the selection process.

A word of caution: At no time should the board promise the role to any one director or create implied expectations. As circumstances change, so too must the responsibilities and attributes of the chair. If you recruit a new director with the promise of a future seat at the head of the table, there is bound to be disappointment and frustration when the situation changes.

The shift to thoughtful and deliberate governance is lifting the veil of secrecy on chair succession planning. Responding to the increased expectations and pressures put on boards across sectors, boards are trading in side conversations and haphazard approaches to chair succession in favour of intentionally designed processes and open dialogue. Boards are heavily investing to ensure they have the right chair to lead during these demanding times. The commitment to a tailored approach, transparency and people is elevating performance inside and outside of the boardroom.