How do you plan for changes on your board?

Loretto Leavy and Ruth Sealy from the University of Exeter Business School have been conducting research to understand better the behavioural dynamics of boards and how behavioural dynamics can drive positive change. In the first phase of their research, they analysed practice by looking at detailed reporting of FTSE 350 companies to develop guidance. The next phase will involve facilitated consultations on behavioural dynamics using their draft guidance. In this blog, the third in a series of six, Loretto and Ruth outline their findings in relation to NED succession planning.

Although succession planning is often acknowledged as being important for board performance, we have found that reporting focuses on executive succession planning in isolation. This has resulted in a lack of consideration of the sequencing of transitions between the executive and non-executive teams. This may be a reflection of the fact that there are only small pockets of guidance on how to plan non-executive succession. Our research aims to provide a framework of how non-executive director (NED) succession is carried out by boards.

Based on our analysis of 50 FTSE companies, we discovered three approaches to NED succession planning that build incrementally as board maturity develops. We found contextual pressures and expected outcomes impact the level of maturity. The first stage of NED succession planning maturity focuses solely on the rotation of NEDs at the end of their tenure with like-for-like replacements. At the next stage, consideration is given to the strategic needs of the board, and finally, at the most mature level, we see boards creating specific plans for emergency and medium to long-term succession. We recommend that NED succession planning should be a focus for the board chair, with oversight from the nomination committee. It is also vital that these processes are transparently reported to stakeholders.

The board’s approach to succession planning to include NEDs

Succession planning relates to plans for leadership changes. Executive succession planning tends to be prioritised and, while it is important and necessary, it should not be carried out in isolation from NED transitions. NEDs act under contract for services to the board, separate to the CEO’s responsibility for employee contracts. Therefore, NED contracts and their succession are the responsibility of the chair who is normally supported by the company secretary. Carrying out both executive and NED succession planning alongside one another ensures smooth transitions among the most senior leadership of the company. The benefits of this complimentary approach to succession planning are seen particularly in the ability to manage the appropriate sequencing of changes between the chair and the CEO.

Interestingly, within our sample, a small number of boards conflated NED succession planning with other processes, such as appointment and skills reviews. We believe that this is reflective of a lack of common language relating to NED succession planning. This is amplified by a lack of understanding of the frame of reference around NED people processes around the interlinking of those processes. Our research provides a structure of NED succession planning via a maturity map which details the key contexts, procedural steps, outputs and outcomes across three maturity levels.

A NED succession maturity map

Our research identified three different approaches to NED succession planning which build incrementally as board maturity increases.

1. Reacting solely to the rotation of expiring director tenure. This focuses on the natural rotation of NEDs when they reach the end of their term of office. This plan will lead to the director being replaced like for like.
2. Pre-emptively considering the strategic timing of tenure rotations. Building on the rotation processes, this assesses the scheduled gaps against current and future strategic requirements.
3. Proactively building the planned approach, by establishing specific plans for emergency and longer-term succession for all board roles, not just the CEO. Building further on the strategic approach, this approach incorporates planning across three horizons – emergency, near term and longer term – for each NED role, including whether this would need to be sourced from outside the current board. In a small number of companies, market mapping of potential candidates was happening ahead of a formal appointment process.

The final outcome of effective NED succession planning is the satisfactory sequencing of leadership changes to ensure continued market and stakeholder confidence. The appropriate and proportional procedural approach will reflect the board’s contextual pressures and expected and actual outcomes by the board’s stakeholders.

In our sample, regulatory expectations were an influential factor placing pressure on boards to carry out succession planning. In the UK, the Corporate Governance Code sets an expectation for both NED and executive director succession planning. This planning should be integrated with diversity considerations to develop a diverse pipeline that is then overseen by the nomination committee. In the Corporate Governance Code Guidance, the chair’s central role in succession planning is highlighted, in addition to their responsibility to develop specific plans for emergency, medium and long-term recruitment.

In our sample, we found that shareholder and investor expectations increased the maturity of approach. In particular, these groups have opinions on the appropriateness of directors and their perceived effectiveness which they can express via AGM director voting, albeit predominantly via standardised policies applied to the board. Board-specific pressure escalated further when a company was under financial or market strain. The identification of specific skills, sequencing or size issues from board evaluations and composition reviews can also impact NED succession planning. Furthermore, the level of support available from the company secretary to the chair is also a factor.

Reflections from our workshops

The first draft of the NED Succession Plan Maturity Map was validated in workshops where it received robust challenge. A number of areas were discussed including:

• the importance of the company secretary’s role in supporting the chair and nomination committee in NED succession planning
• the benefits of transparent communication of NED succession arrangements inside the board as well as to stakeholders
• how transition plans were useful in the more mature plans
• key group/subsidiary and shareholder interactions with the plan
• the central role of diversity and, in more mature organisations, of inclusion
• that contra indicators can be useful in mature boards when it comes to discussing behavioural fit and the balance of the board.

Reflections will continue based on the feedback and these will be incorporated into the draft guidance to be published in early 2025.

Board behavioural dynamics research

NED succession plans are part of a bundle of actions deployed for board behavioural dynamics. We assume that there is no gap between reporting and the actions taken by the board. However, we are validating our findings against real-life experiences. The maps will continue to be validated over the coming months before being published for formal consultation in the early new year. The research is sector and jurisdiction agnostic although size is a factor, with the mapping aligned to boards of large, highly regulated companies and organisations. This mapping is part of our work on defining the ecosystem for board behavioural dynamics.

Our research is part of a board behavioural dynamics and strategic inclusion research programme.. We are also interviewing chairs, board members and senior independent directors.

Please register for further workshops or to receive our programme updates.

Loretto Leavy FCG and Professor Ruth Sealy, University of Exeter Business School