The chair must keep one eye on CEO and CFO succession and board composition, while keeping another on what organisations require from the role of chair itself.
The chair is in a unique position when it comes to a subject that is vital to the success of every business: succession. On the one hand, chairs play a crucial role in ensuring there is a sensible and appropriate succession plan in place for the two most important executive positions: CEO and CFO. Meanwhile, as has been discussed throughout this report, they are also tasked with ensuring a diverse composition of non- exec board members around them. And all the while considering whether they are meeting the evolving needs to best serve as chair themselves.
When it comes to the issue of succession as it sits on the risk register, ensuring the future stability and success of the CEO and CFO roles is business critical and one of the most important functions of a chair. With the general business landscape so much more volatile and uncertain today, it is increasingly vital that chairs and boards are more concerned and involved with wider succession at the executive level, understanding what skills and traits are required across the executive leadership team.
Amidst the global war for talent, which continues to intensify, particularly in areas like digital and cyber, chairs should recognise that the accelerating pace of change is likely to lead to a faster cycle time at the executive leadership level, and indeed at all levels in the business. Neglecting to regularly review a clear succession plan for all key executives therefore risks significant damage to the business, as does failing to consistently appraise the specific leadership traits required and benchmarking incumbents against not only competitors but leaders in other industries too.
“The broader governance will trigger a sea change in the cadre running FTSE businesses,” said the CEO of a FTSE 250 company in a 2021 board survey by Savannah Group. A former FTSE 100 chair added: ‘’The chair needs to make the timely call as to whether the current CEO is part of the solution or the problem, and to understand the nature of the strategic challenge the next CEO has to deal with.”
If there’s going to be more dynamic change in the market it is essential that the board devotes more time to reviewing the skills and capabilities among the executive leadership of the business, and is in tune with what’s changing at a strategic and an operational level. If that means the leadership requires fresh talent, the chair and board should be prepared to push for action.
Composition of the board
The same principles apply to the composition of the board itself. Several survey respondents of Savannah’s survey noted the paradox that it is regarded as normal for a new CEO to make significant changes to the executive team within their first 12 to 18 months, but board changes when a new chair joins are rare. Naturally, a CEO may wish to reunite with past colleagues or refresh talent to reflect a new strategy. Yet, curiously, when a new chair is appointed, by and large the other non-execs continue as they were until such time as they are no longer deemed independent and rotate off.
In light of new board priorities, including digital transformation, purpose and diversity, a number of survey respondents questioned whether chairs will become more proactive in changing the make-up of the board soon after their own appointment. There is no doubt that board composition is more important than ever, and if the chair is genuinely committed to achieving a more diverse, multi-talented board, we can expect greater chair-driven personnel change.
There is no playbook for many of the issues that boards must deal with today. In that context, chairs need the greatest diversity they can possibly get around them, not just in terms of gender and ethnicity but also background, education, experience and skillset. Chairs still have to be skilled at managing the dynamics of the board, but they’ve also got to build the right one, with non-executives that bring a greater breadth of transferable knowledge and experience than ever before. “The chair needs to build a diverse board in every sense,” said one FTSE 100 chair.
However, it is also important that diversity is balanced by relevance. Historically, where serving executives have been appointed as non-executive directors on other boards they have almost exclusively been CEOs and CFOs. In future, will chairs be bold enough to appoint chief digital officers or chief technology officers to the board, if innovation and digital transformation are central to the company’s success? It is certainly one way to address an increasingly important fact of the rising issue load.
“We need more people with strong operational experience and deep technology understanding and literacy,” said the chair of a privately owned company. “If they can’t argue the merits and demerits of blockchain, or why micro services are the future, they aren’t going to be able to support the dramatic technology revolution most sectors will undergo in the next ten years.”
Another important consideration for chairs is whether committee structures need to evolve in line with changing business priorities. Given the changing governance landscape, one has to question whether the traditional committee format is still fit for purpose. “I would argue boards should have a technology committee to go with the audit, remuneration and nominations committees,” said the chair of a privately owned firm.
Chair succession
The final dimension is succession as it relates to chairs themselves. Rather than being identified for their former successes as CEOs or CFOs, as chairs often have been historically, we expect to see succession based on broader management experiences. “Those who have been tested in a crisis bring significant value,” said one experienced chair, and it’s particularly apt in light of the likelihood for future disruption and turbulence.
The last 18 months have in many ways been an extreme example of the increasingly VUCA business environment of recent years. In that context, chair succession may be evolution rather than revolution, but there is appetite for change. “Too many chairs are former CFOs which leads to a focus on financial reporting and playing to the sometimes short-term demands of the City,” said one survey respondent. The NED of a FTSE mining company said changing values and expectations, societally and technologically, and the board priorities they fuel, challenge board make-up. “I think we’ll move away from the typical ex-CEO or CFO succession route to chair, to people with greater experience of ESG and stronger skills in innovation and future thinking.”
A portfolio NED had a more blunt appraisal: “A good chair instinctively shelves their own ego for the benefit of the organisation. Former, particularly recent, CEOs might find that doesn’t come naturally.” That’s not to say, however, that the current cohort of chairs are necessarily ripe for change. Agility is crucial, and many of today’s chairs have amply demonstrated their ability to adapt to the changing demands of the role over the last 18 months.
Values, meanwhile, may eventually eclipse hard experience. “A real sense of people, purpose and culture relies on individual skills rather than specific discipline or background,” said the CFO of a listed manufacturing firm, while another board member echoed the need for more well-rounded, purpose-driven individuals. “Societal purpose will only become more important,” he said.
For more information, download Savannah Group’s ‘Sequencing the DNA of the Future Chair & Board’ report here.
