<The boss called one of his employees into the office. "David," he said, "you've been with the company for a year. You started off in the post room, one week later you were promoted to a sales position, and one month after that you were promoted to district manager of the sales department. Just four short months later, you were promoted to vice-chairman."
"Now it's time for me to retire, and I want you to take over the company. What do you say to that?"
"Thanks," said David.
"Thanks?" the boss replied. "Is that all you can say?"
"I suppose not," David said. "Thanks, Dad.">
(source aish.com)
The succession planning is a business strategy in an organisation used to pass leadership roles down to another individual. Succession planning needs to ensure that businesses continue to run smoothly and without interruption. Succession planning is a good practice for being implemented for companies, but also for law firms, associations, and public authorities – the principles and the steps are the same.
The succession planning for listed companies implies several mandatory steps:
1. Identifying the roles that needs to be refreshed – for instance, persons that have a very long tenure, members of the board or senior directors that want to retire or to choose other professional challenges. The process should be performed at least on yearly basis, and it should be done after the yearly evaluation of activity process. Usually, the process is managed by the nomination committee.
2. Updating the skill matrix of the board / senior management team, identifying the skills and experience needed from new candidates. For this process the developments and innovations in the society, sector and country needs to be considered. For instance, in 2013 the list of skills needed for members of the board in a listed companies are very different comparing with 2023 list. The use of technology, ESG developments and cybersecurity add new skills desired for a balanced board. Usually, the process is managed by the nomination committee.
3. Setting the gender quota needed. The gender balance is an important subject for listed companies, but also for law firms and public authorities. Evidence has shown that more balanced management teams make better decisions. Having more women in decision-making positions is also expected to boost gender equality more generally. Allowing both women and men to fulfil their potential is crucial for economic growth and competitiveness.
For listed companies there is a European Directive approved on 22 November 2022 to promote more balanced gender representation on the boards of listed companies. The directive, which will have to be transposed into national law, lays down that at least 40% of non-executive director positions in listed companies should be held by members of the underrepresented sex by 2026. If member states choose to apply the new rules to both executive and non-executive directors, the target would be 33% of all director positions by 30 June 2026. The core of the directive stipulates that listed companies which do not achieve the objectives will need to adjust their selection process. They will have to put in place fair and transparent selection and appointment procedures, based on a comparative assessment of the different candidates based on clear and neutrally formulated criteria. When companies have to choose between equally qualified candidates, they should give priority to the candidate of the underrepresented sex. The Directive entered into force on 27 December 2022.
4. Identifying succession options (list of candidates) and proposing the most suitable option(s). This subject seems to be very sensible for some listed companies (especially for Romanian State controlled companies). There are many selection processes managed by Romanian State and the final list of candidates is identical with the interim directors appointed at the proposal of the Romanian State. In some cases, the successful candidates are members in the section committee, that put them in a potential conflict of interest position. For other listed companies (for instance Austrian companies) many candidates proposed to be appointed are overboarded and this is a material issue, as an overboarded person do not have enough time to allocate to all activities.
5. Shareholders vote for candidates proposed, in case of the board. For senior management the appointment process is different and depends by each company rules.
6. Induction process for new members of the board or new senior directors appointed. Even this process is very important, as sometimes new directors appointed are just presented and is expected to perform the task of the predecessor from first day. Induction process is not only for the accommodation to the new role but is also a learning process and it needs time.
The role of the nomination committee in listed companies is very important in succession planning. In their annual report the listed companies should describe the work of the nomination committee, including:
• the process used for appointments and the succession planning
• how the board and the senior management evaluation has been conducted, if an external evaluator was used, the outcomes and actions taken or proposed to be implemented
• the policy on diversity and inclusion and
• the gender balance for the senior management and the direct reports.
Have you identified the elements above in the annual reports published by listed companies?