Board Chair Succession Planning

Special Report

09In Partnership with Patrick O’Callaghan and Associates

With 83%1 of major Canadian boards now separating the roles of chair and CEO, there has been an increased focus on board leadership as one of the most important factors determining board effectiveness. While undertaking hundreds of board and director assessments and searches over the past fifteen years, Patrick O’Callaghan and Associates and Korn/Ferry International have consistently found that the boards operating most effectively have exceptional board chair leadership. Conversely, when a board is struggling, poor board leadership is inevitably one of the problems. The board chair has an enormous impact on board performance and exercises significant discretionary influence over both the board and management.

The objective of this survey was to better understand how Canadian boards plan for the succession of the board chair. Korn/Ferry International and Patrick O’Callaghan and Associates surveyed 185 directors across Canada during the spring and summer of 2009 soliciting their comments and views regarding board chair succession planning.

Introduction

SPECIAL REPORT

BOARD CHAIR SUCCESSION PLANNING

1 Corporate Board Governance in Canada, A Review of 2009, Korn/Ferry International in Partnership with Patrick O’Callaghan and Associates.

Board Chair Successsion Planning Special Report 2009 | 1

Highlights of Survey

• Ninety-sevenpercentofthedirectorssurveyedbelievethatboardleadership iseitherimportantorveryimportanttotheeffectivenessoftheboard.

• Directorsindicatedthatthefourmostimportantresponsibilitiesoftheboard chairareensuringtheboardhasastrategicfocus,helpingsetthetoneand cultureoftheorganization,managingrelationshipsandensuringthatthe Board is operating effectively.

• Directorsindicatedthatthekeyskillsandexperiencerequiredbyamodern chairincludeprevioussignificantleadershipexperience,outstanding communicationskills,anunderstandingoftherelevantbusinessand industry,andthetimetodevotetoundertakingthebroadrangeofboard chairresponsibilitiesintoday’senvironment.

• Justoverhalfofallthedirectorsinterviewedindicatedthattherewasnoboard chairsuccessionplanningprocessinplacewithintheirorganization.

• Whendirectorswereaskedifboardchairsuccessionplanningreceivedthe appropriateamountofattentionwithintheirorganizationforty-ninepercent ofdirectorssaidthateitheritdidnotortheywerenotsure.

• Directorsidentifiedanumberofimportantprinciplesthatshouldbetaken intoconsiderationwhenplanningaboardchairsuccessionprocess.

Asset Size PercentageLess than $500 million (Small) 12%$500millionto$5billion(Mid-Size) 50%Morethan$5billion(Large) 38%

Director Respondents by Company Size

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Directorsemphasizedthattheboardchairsetsthetonewithintheboardandmorebroadlythetone betweenmanagementandtheboard.Thefollowingcommentcapturesthesentimentexpressedby many of the directors who were interviewed:

“The board chair sets the tone for the whole board and indirectly for the management team; he/she has the responsibility of making sure all board members are heard on topics of importance to the corporation; the chair’s leadership and management of meetings is critical to ensure that issues are fully vetted and decision making reflects the input of the whole board in a timely fashion.”

Theeffectivenessofaboardchairisdeterminedbyhis/herabilitytounderstandandworkeffectively withagroupofcolleagueswhoshareresponsibilityforboardeffectiveness.

“Boards are a collegium of equals. There is no management hierarchy. The Board Chair, therefore, is a leader of equals. Boards aren’t about individual achievement.”

The Importance of a Board Chair’s Leadership to Overall Board Effectiveness

How Important?

Directorsoverwhelminglybelievethattheboardchair’sleadershipiscriticaltotheboard’seffectiveness.Ninety-sevenpercentofthedirectorssurveyedbelievethatboardleadershipiseitherimportantorveryimportanttotheeffectivenessoftheboard.Eighty-threepercentbelieveitisveryimportant.Thisresultwasconsistentacrossallsizesofcompaniesandindustries.

97%Ninety-seven percent of the directors surveyed believe that board leadership

is either important or very important to the effectiveness of the board.

Small Mid-Size Large ALL

Very Important 82% 82% 85% 83%

Important 18% 14% 14% 14%

Somewhat Important 0 4% 1% 3%

Not Important 0 0 0 0

Importance of Board Chair’s Leadership to Overall Board Effectiveness

Board Chair Successsion Planning Special Report 2009 | 3

Board Chair Responsibilities

Weaskeddirectorstoidentifywhattheybelievedtobethethreeorfourmostimportantfunctionsof theboardchair.Whiletherewasawiderangeofresponsesmostcouldbegroupedintothefollowing fourcategories.

Strategic Focus

Boardsareincreasinglyinvolvedinworkingwithmanagementonstrategyandriskassessment.Directorsindicatedthattheboardchair’sabilitytofocustheboardontheorganization’sstrategicperformanceiskeytoensurethattheboardisoperatingeffectivelyandattheappropriatelevel.

Fromapracticalpointofviewtheboardchairimplementsastrategicfocusbyworkingwithmanagementandtheboardinsettingandmanagingtheagendaforboardmeetingsanddevelopingtheboard’spriorities.

“The board chair must understand the challenges and risks facing the entity and focus board time on those issues.”

“Work with the directors and management to set the agenda for the board; engage the CEO and top management leaders in identifying, at the end of one year, the top risks and opportunities facing the corporation in the subsequent year, and then to decide which are priority issues, which will constitute the board’s core agenda and be the subject of in-depth board consideration.”

The board chair must understand the challenges and risks facing the entity and focus

board time on those issues.

Setting the Tone and Culture

Theboardchairsetsanexampleofintegrityandethicalleadershipfortheorganization.Theboard chair’sleadershiphasanimportantimpactonestablishingthecultureoftheboardandorganization.

“The chair must create an environment that ensures the company conducts itself in the highest ethical and behavioural standards.”

“Every organization has its own dynamics and the board chair must build a productive, respectful relationship - not in a high handed manner but by building trust and taking issues back to the CEO without criticism; with sensitivity and integrity.”

Manydirectorsarguedthattheboardchair’sinfluenceintheattractionandretentionofdirectorswas criticaltoestablishingtheboard’scultureandensuringthattheboardhastheskillsandexperienceto effectivelyprovideoversightandaddvaluetotheorganization.Inadditiontheboardchair’scommitment toboardanddirectorevaluationandon-goingdevelopmentwaskeytoestablishingtheboard’sculture.

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Managing Relationships

DirectorsfelttheboardchairisthecriticalinterfacebetweentheboardandtheCEOandamongthe directors.Theboardchairencouragesandfacilitatesthecontributionofdirectors.Thisiscriticalto ensuringadirector’sskillsandexperiencearebeingeffectivelyutilizedandthatdirectorshaveasense ofengagementandcommitmenttotheorganization.TheboardchairmustworkwiththeCEOtoensurethereisclearunderstandingofprioritiesandissues.

“The board chair is the key liaison between the board and senior management and is responsible for addressing difficult issues between the two groups in an attempt to resolve them so that the issues can be dealt with on a consensus basis at board and committee meetings.”

“The board chair provides the interface between the CEO and the board between meetings - providing feedback to the CEO about in-camera sessions and acting as a facilitator for contentious issues between the CEO and the board.”

“The board chair has the tough task of building a team out of a group of individuals – ensuring strong contribution by all members so management gets full benefit from the board; ensuring good vibrant discussion and debate and bringing it to a close; creating an open, safe environment for people to speak fully; and ensuring the appropriate treatment of input.”

Inadditiontheboardchairtakestheleadtoensurethattheboardisawareoftheconcernsandissuesofmajorshareholders,stakeholdersandthecommunity.

Ensuring the Board is Operating Effectively

Directorswereemphaticabouttheboardchair’simportanceinsettingtheagendaandprioritiesoftheboardandensuringthattheboardclearlyunderstandsitsrolewithrespecttogovernanceversustheday-to-daymanagementoftheorganization.Theboardchairhasanenormousimpactonwhethertheboardisconfrontationalorcollaborativeinitsapproachwithmanagement.Manydirectorsusedtheanalogyofanorchestraconductorwhodrawsinthedifferentinstrumentseithertogetherorindividually,andsetsthepace,volumeandqualityofthemusictheorchestraproduces.

Theboardchairisresponsibleforworkingwithmanagementtoensuretheboardisreceiving,inatimelyfashion,thequantityandqualityofinformationitneedstoconsiderissuesandmakedecisions.Theboardchairensuresthecommitteesareappropriatelyconstituted,ledandoperatingeffectively.

“The board chair organizes and co-ordinates board and committee agendas ensuring they are properly balanced; that the appropriate materials are received in a timely fashion; and, liaises with the management team after the meetings.”

The board chair has the tough task of building a team out of a group of individuals –

ensuring strong contribution by all members so management gets full benefit from the board.

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Important Attributes/Skills Required for Effective Board Chairs

Weaskeddirectorstoidentifywhattheyfeltwerethecriticalskillsandexperiencerequiredforaboardchair.Theskillsandexperiencetendedtofallintothefollowingbroadcategories.

Leadership Skills

Mostdirectorsfeltthattheidealbackgroundforaboardchairwaspreviousleadershipexperienceindeal-ingwithcomplexstrategic,succession,humanresource,compensation,andshareholder/stakeholderissues.Inaddition,experiencewithabroadrangeofinternalandexternalstakeholderswasviewedtoberelevantandhelpful.

“The board chair must have the courage (and energy) to follow through and deal with difficult issues in stressful situations; wisdom and good judgment, gained through relevant previous leadership experience.”

“The board chair must be the consummate leader and must have the ability to promote respectful working relationships between the board and management. In addition the chair must have unassailable integrity, great communication skills and lead the board in providing effective oversight of the CEO and management.”

Communication Skills

Theboardchairtodaymustbeasophisticatedandexpertcommunicator.Thefollowingdirectorcommentscapturethemajorcommunicationthemes.

“The board chair needs curiosity. The chair must ask lots of questions and then listen very well. The chair must be able to pull the right information out of board members and management, encouraging rich dialogue to cement decisions. The chair needs a sense of humour and the ability to create an environment of trust and openness where people will express their views.”

“The board chair must be conspicuously independent and fair; patient; encourage and ultimately reconcile competing points of view; balance the natural tension that exists between any active board and a strong management team.”

“The chair must listen; encourage debate; be the provocateur without offending anyone; dig into corners where no one is looking.”

Business/Industry Experience

Experienceintheorganization’sindustryorastrongunderstandingofthebusinessenvironmentinwhichtheorganizationoperates,wasidentifiedasanimportantboardchairattribute.Iftheboardchairlacked directexperienceintheindustry,thendirectorsfeltthatthereshouldbeaverystronginterestinthe industrysupportedbyoperatingexperienceinanenvironmentthathadsimilarcharacteristics.

“The board chair should have a strong understanding of the enterprise and the principal risks facing the organization; sound judgment, and a reputation that gives the board chair credibility.”

Time Availability

Theboardchair’srolerequiresmoretimeandattentionthanhistoricallyhasbeenthecase.Directors emphasizedthattheboardchairmustbeavailabletospendthetimeandenergynecessarytoleadthe boardinitscriticalactivities;workingcloselywiththeCEOandotherseniormanagement,board committeesandindividualdirectors.

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Board Chair Succession Planning ProcessThe Current Situation in Canada

Justoverhalfofallthedirectorsinterviewedindicatedthattherewasnoboardchairsuccessionplanningprocessinplacewithintheirorganization.Largercompaniesweremorelikelytohaveaprocessthanmidtosmallersizedcompanies.Incompanieswheretherewasaboardchairsuccessionplanningprocessitwasmorelikelytobeinformal.

“I have served on up to ten boards and have had five chair roles - board chair succession planning was never on the agenda.”

Whendirectorswereaskedifboardchairsuccessionplanningreceivedtheappropriateamountofattentionwithintheirorganizationforty-ninepercentsaideitheritdidnotortheywerenotsure.Webelievethattheresultsofoursurveyindicatethatthereisasignificantopportunityforboardstoimprovetheboardchairsuccessionplanning;especiallyconsideringthenearunanimousviewthattheboardchair’sleadershiphassignificantimpactofontheboardeffectiveness.

Small Mid-Size Large ALL

No 57% 57% 43% 51%

Yes, Formal Planning Process 19% 16% 25% 21%

Yes, Informal Planning Process 24% 27% 32% 28%

Percentage of Respondent Companies with a Succession Planning Process in Place (by Asset Size)

One of the strongest themes in our discussions was the lack of clarity around who has the

responsibility for board chair succession planning.

Board Chair Successsion Planning Special Report 2009 | 7

Board Chair Succession Principles

“The big issue is the ability to deal with a chair who is ineffective or who has simply stayed too long. Ideally, a board will have a succession process which identifies issues and timelines well in advance; ensuring the board has one or more potential successor candidates is critical.”

Forty-ninepercentoftheintervieweddirectorsarecurrentlyworkingwithorganizationsthatundertake eitheraformalorinformalboardchairsuccessionplanningprocess.Althoughfifty-onepercentofthe directorsindicatedthattherewasnoboardchairsuccessionplaninplace,manyhadveryconstructive suggestionsregardinganeffectiveboardchairsuccessionplanningprocess.

Thefollowingsummaryprinciplesemergedfromtheinterviewsandsurveys.

Accountability

Oneofthestrongestthemesinourdiscussionswasthelackofclarityaroundwhohastheresponsibilityforboardchairsuccessionplanning.Nearlyalldirectorsindicatedthatthereshouldbeclearresponsibilityfortheprocessandthemajorityindicatedthatresponsibilityshouldbepartofthegovernancecommittee’smandate.Althoughsomefeltitwastheresponsibilityofthecurrentchair,mostfeltthattheprocessisbetterunderstoodandmoreeasilymanagedifitisacommitteeresponsibility.

Process Clarity

TheGovernanceCommitteeshouldhavetheresponsibilityforclearlyarticulatingtheprocessandensuringthatitisreviewedanddiscussedatleastonanannualbasis.Directorsindicatedthathistoricallytherehasbeensomemysterytotheprocessbutthatgiventheimportanceoftheboardchair’sroleintoday’senviron-mentthatitwasmuchmoreconstructivetolayouttheprocessinatransparentandopenfashion.

The Importance of the Board Chair Mandate

Theremustbeaclearandcurrentpositiondescriptionfortheboardchair.Thisdescriptionshouldbereviewedonaregularbasis,asshouldtheskills,experienceandbackgroundthatarerequiredtoundertakethemandate.Boardleadershiprequirementschangeasorganizationsevolveandgrow.

Small Mid-Size Large ALL

Yes 54% 43% 60% 52%

No 41% 43% 29% 37%

Not Sure 5% 14% 11% 11%

Percentage of Respondent Directors who believe that Board Chair Succession Planning Receives the Appropriate Level of Diligence

and Attention (by Asset Size)

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Board Chair Evaluation

Anintegralpartofanyboardchairsuccessionplanisaregularboardchairevaluationprocess.Ideallypartoftheprocessshouldbeafeedbackmechanismthatprovidesforthedevelopmentofactionplansandareviewofhoweffectivelytheboardchairhasrespondedtoanyissuesraisedintheperformanceevaluation.

“Every board has its own chemistry, and it is difficult to be prescriptive and formulaic about good appraisal and succession practices. The vital essential, in my view, is an annual, confidential appraisal of the chair’s performance, in which all directors are obliged to participate.”

Chair Succession Triggers

Witharigorousandthoughtfulboardchairevaluationprocess,mostdirectorsbelievedthatboardchairperformanceshouldbethekeydriverwhenconsideringboardchairturnover.Howevertherewereothertriggersorpoliciesthatdirectorssuggestedmaybeusefulindeterminingthetimingoftheprocess: • Adirectorretirementpolicy. • Alimitationtothetermornumberoftermsadirectormayserveontheboard. • Somedirectorsbelievedthatthereshouldbeanintenserevieweverythreeorfouryearsfortheboard chair, especially if there is no retirement age or term limit. • AnumberofdirectorsindicatedthatachangeintheCEOwasalsoanimportantfactorinconsidering the leadership of the Board.

Therewasnoconsensusregardingtheabovepoliciesalthoughtherewasconsensusaroundboardchairperformanceasbeingthemostimportantfactortoconsider.

“Chair succession needs to be driven by performance.”

Directorsdidhoweversuggestthattheboardshouldconsidereachoftheabovefactorsandhaveapolicyregardingtheirimplementationwithintheirorganization.

Committee Leadership

Committeesplayavitalroleinboardeffectiveness.Anopportunitytoleadacommitteewasseenasan importantdevelopmentopportunityforpotentialboardchaircandidatesandanopportunityforall directorstoconsidertheleadershipskillsofpotentialboardchaircandidates.

Director Recruitment

Potentialboardleadershipshouldbeanimportanton-goingcriterionwhenrecruitingnewboardmembers.Directorsindicatedthatattractingpotentialnewdirectorswhohavetheabilityandthetimetochairtheboardisakeyelementoftheboardchairsuccessionplanningprocess.

Individual Director Evaluation

Every board has its own chemistry, and it is difficult to be prescriptive and formulaic

about good appraisal and succession practices.

50%

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Directorsemphasizedthatindividualdirectorevaluationwasanimportantaspectofboardchairsuccessionplanning.Theevaluationsprovideindividualdirectorswithanopportunitytounderstandhowtheycancontributetotheboardbutitalsoprovidesthedirectorwiththeopportunitytoidentifyhowtheboardcanimproveandbemoreeffective.Theseinteractionsovertimehelpboards’toidentifydirectorswhohavetheconfidenceoftheircolleaguesandtheabilitytopotentiallyleadtheboard. The role of the CEO

MostdirectorsfeltthatitwasimportantthattheCEObeconsultedandadvisedthroughouttheprocess. AlthoughtheCEOshouldnotcontroltheprocess,norformallybeinvolvedinmakingtheselection, directorsemphasizedtheimportanceoftheCEOandtheboardchair’sabilitytoworkeffectivelytogether.

SummaryTheintervieweddirectorsoutlinedwhattheyfelttobethekeyresponsibilitiesoftheboardchairand theimportantskillsandexperiencethatarerequiredtoundertakethefunction.Indiscussionswiththesurveyeddirectors,asetofprinciplesemergedthatboardsshouldconsiderinplanningtheirboardchairsuccessionprocess.Theseprinciplesarenotmeanttobeprescriptivebutrathertoprovideaframeworkforconsideringtheimportantissuesrelevanttoplanningfortheleadershipoftheboard.

Directorsstronglybelievethatboardeffectivenessisinextricablylinkedtoboardleadership.Althoughtheboardchairhasanenormousimpactonboardeffectiveness,onlyhalfofthedirectorssurveyedworkwithorganizationsthathaveaboardchairsuccessionplanningprocessinplace.Webelievethisprovidesarealopportunityformanyboards.

Only half of the directors surveyed work with organizations

that have a board chair succession planning process in place.