Boards heavily involved in CEO succession planning, but often delegate duties

Corporate boards devote frequent attention to CEO succession planning, but they are divided in how they delegate such responsibilities, new research suggests.

Eighty-four per cent of nearly 200 US corporate secretaries surveyed said their full board reviews CEO succession planning at least once a year, according to the 2012 Board Practices Report published by Deloitte and the Society of Corporate Secretaries and Governance Professionals.

But the primary responsibility for the CEO succession planning process was split, with those duties given to:

• The entire board (identified by 33% of respondents).
• The compensation committee (27%).
• The nominating/corporate governance committee (25%).

“Some would say it’s the board’s responsibility, and ultimately it is,” said Maureen Errity, director of Deloitte LLP’s Center for Corporate Governance. “The full board needs to be talking about it, and hearing from the CEO and making the final decision. Others would say it’s OK to delegate to one of the independent committees of the board.”

Succession planning should be on the board’s agenda and, perhaps, should even be a standing item on the executive succession agenda, Errity said. It’s also important for the CEO to take a lead role, she said.

But at the board level, Errity said, the compensation committee naturally often takes an active role in succession planning because the committee already is working with the current CEO on goals, objectives and evaluations, and their ties to strategy.

The nominating committee can have an important role because it works with search firms on director recruitment. These ties can help that committee gain insight on CEO candidates from outside the company, according to Errity.

“The key is, if you do delegate to one of the independent committees, you want it to be documented, obviously, and designated in their charter as to who takes responsibility,” Errity said. “Then that committee is responsible for making sure that the full board has it on their agenda and is involved in the full conversation.”

Fifty-eight per cent of boards represented in the survey review CEO succession plans once a year, and 26% review them more than once a year. Errity said that because CEO tenure tends to be short, it’s vital for boards to pay attention to succession.

“Good CEOs recognise that this is for the benefit of the organisation,” she said. “And having a plan in place can be very powerful and also allow for better overall governance.”

Other findings from the survey included:

• Expertise is critical. Industry knowledge was identified by 47% of respondents as the most important trait they look for in new board members. The next highest trait, technology or IT knowledge, was identified by 19% of respondents. The survey did not ask specifically about the importance of finance knowledge, but Errity said it is critical because accounting rules are changing rapidly. “For audit committees, having financial expertise is a requirement, and I think finance is a big, significant skill when it comes to board service,” she said.
• Risk oversight is divided. Just 7% of boards represented have a board risk committee. Primary responsibilities for risk oversight were commonly assumed by the full board (31%), the audit committee (29%), or spread across all board committees (22%).
• Diversity remains elusive. Eighty-six per cent said their board consisted of 25% or fewer minorities, and 81% said women held one-fourth or fewer of their board positions.

Related CGMA Magazine content:

“More Women Join Boards, but Progress Comes Slowly”: In the past six years, women joined boards of directors of S&P 1500 companies in increasing numbers, diversifying the boards’ expertise, skill sets and viewpoints. But one-fourth of boards still did not have women directors in 2012.

“CFOs in High Demand for Board Positions”: When it comes to corporate boards, CFOs increasingly are in demand for their financial and strategic expertise. The benefits of serving in those positions include gaining general management or board knowledge, and gaining exposure to different companies or industries, according to a new report.

“In-Demand Directors See Pay Rise Nearly 10%”: Average pay has increased nearly 10% in the past year for directors of public companies, according to an analysis by BDO USA. Board retainers and fees make up about three-fourths of directors’ total compensation. Directors make the most, on average, in the technology sector ($177,249).

—Ken Tysiac (ktysiac@aicpa.org) is a CGMA Magazine senior editor.