ROLE OF BOARD IN SUCCESSION PLANNING

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ROLE OF BOARD IN SUCCESSION PLANNING

• Robert E. Hallagan
• Chairman, Center for Board Leadership
• Vice Chairman, Heidrick Struggles
• January 11, 2005

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FOUR TYPES OF BOARDS

• Negative Impact
• Neutral/No Impact/Rubber Stamp
• Basic Monitor/Check List Board
• Strategic Asset/Performance Enhancer/True
  Competitive Advantage

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Current Performance as Private Company
Shareholder Value
Years
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Performance as Private Company
Future Performance Projected Board Impact??
Shareholder Value
No Board
With Board
IPO Years
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AN EXPANDED VIEW Mission To be a valued asset
of the company measured by the contribution we
make collectively and individually to enhance
long-term shareholder value To Achieve
Mission Boards responsibility is to enhance
decisions and to ensure company has the right
business best practices in place to enable it
to consistently outperform the competition and
maximize shareholder value Isnt this what
shareholders want us to do versus Find the
Crooks ?
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McKINSEY SHARPBENDER RESEARCHCharacteristics of
high-performing companies
Sharpbenders provide returns that consistently
bend sharply upwards
Sharpbender (SB)
Never had its and Found its in roughly the
same place at end of first 5-year period
Sharpbenders and Lost its in roughly the
same place at end of first 5-year period
Found it (FI)
Lost it (LI)
Never had it (NHI)
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RESEARCH OBSERVATIONS

• Sharpbender
• Exceptional long-standing leadership
• Talent rich
• Smooth seamless transitions of leadership no
  crisis inside versus outside
• Performance-oriented cultures
• Assimilate talent easily from outside
• Lost It
• Lost high-performing CEO and team
• Crisis created and CEO selection poor
• Found It
• New CEO primarily outside
• Never Had It
• Many smooth transitions, but wrong pick heavy
  inside bias
• Elaborate succession planning processes
• Poor talent
• Mediocre-captive Boards

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WHAT IS RELEVANT RE TODAYS DISCUSSION?

• Exceptional leadership matters - direct
  correlation between quality of CEO Leadership and
  Corporate Performance
• As economic cycles change, as competitive
  landscapes change, as industries mature, etc. the
  required CEO competencies to maximize performance
  change
• CEOs themselves change over time motivation,
  health, commitment, personal lives, etc.
• Seamless transitions of leadership at the right
  time (not necessarily retirement) without crisis
  enhances long-term investor confidence and
  shareholder value
• Poorly managed talent crises shake investor
  confidence
• Talent-rich organizations are more likely to
  achieve seamless transitions of leadership and
  maximize shareholder value

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MUST EXPAND ELEVATE BOARDS TALENT
RESPONSIBILITY

• To heighten priority
• To focus on the end result maximize leadership
  not on the succession planning process
• To be performance-based not time-based, i.e., not
  planned around scheduled retirement
• To ensure corporation is talent-rich which will
  allow succession to be made seamlessly
• To include actions to energize, motivate and
  retain current high-performing CEO and leadership
  team
• To include continuous assessment of all strategic
  opportunities and alignment with leadership
  capabilities. (Examples Company is above
  average performer in low margin, low-growth
  industry. To maximize shareholder value, company
  must redefine business and diversify. Current
  CEO, although a solid performer against peer
  group, does not have experience or competencies
  to transform business)
• To include thoughtful and continuously updated
  crisis management talent planning

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EVIDENCE THAT BOARD HAS NOT FULFILLED
RESPONSIBILITIES

• Average company performance over extended period
  same CEO
• Company not having strong internal successor
  candidates
• Repeated poor CEO selections
• High-performing CEO attracted away
• Crisis created by health issues or personal
  problems that could have been diagnosed
• Retirement of CEO delayed because there is no
  successor
• Time-based succession planning versus
  performance-based succession planning
• Competencies of CEO not aligned to major shift in
  business cycle or competitive landscape

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BARRIERS TO FULFILLING RESPONSIBILITY

• Boards not making leadership and talent top
  priority
• No formal strategic plan with quantifiable
  performance benchmarks
• No annual formal CEO evaluation
• Not having strong independent directors with high
  standards and excellent leadership assessment
  skills
• Not having scheduled executive sessions with
  continuous feedback with CEO
• Board not holding CEO accountable for developing
  talent-rich organization
• CEO control over succession planning
• Directors not holding company to high standards
• Directors that de-energize CEO and leadership
  team with pettiness, micro-management and
  uninspiring view of compensation

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PROCESS TO FULFILL LEADERSHIP AND TALENT
RESPONSIBILITY

• Approval of winning Strategic plan that
  maximizes shareholder value
• Establishment of measurable goals and objectives
  that track performance against strategic plan,
  competitors and other appropriate shareholder
  value benchmarks
• CEO Evaluation (Board may consider the advantage
  of having a formal three-year contract with CEO
  to help ensure that this is done with a
  thoughtful process.)
• Performance against objectives
• Continuous up-date and review of toughest
  challenges facing company in next three to five
  years
• Lifestyle and Motivational Health Review
  extensive annual check-up to assure CEO in
  excellent health and motivationally charged to
  lead company
• Formal Decision
• CEO has performed contract renewed with
  enticing golden handcuffs
• CEO has not hit objectives but board has
  confidence CEO has action plan in place to
  recover one year extension renewed

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PROCESS TO FULFILL LEADERSHIP AND TALENT
RESPONSIBILITY - 2

• Board-driven programs to mentor, develop and
  energize incumbent high-performing CEO to
  maximize his/her performance and retain.
  Programs include
• Continuous positive open feedback
• Development programs to build competencies that
  are aligned with toughest challenges
• Compensation that is linked to performance,
  highly competitive with compelling golden
  handcuffs
• Ensure Board/CEO relationship is energizing
• Board-driven programs that ensure corporation is
  talent-rich
• Redefine and elevate responsibilities of
  compensation committee. Focus of Charter should
  be to ensure company has right leadership at
  right time and is talent rich
• Committee activities would include
• CEO evaluation
• Active involvement performance reviews senior
  leadership team
• Continuous review of talent development program
• Assessment value proposition for top talent
  including cultural assessment

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PICKING THE RIGHT CEO

• Reasons for CEO openings may vary, but the
  thought process and tasks required to pick the
  right CEO are the same, and should not be cut
  short because of a crisis or with normal
  retirement. The cost of hiring just an
  acceptable internal candidate or an average
  CEO, is enormous.
• TASKS
• Strategic assessment and critical success
  factors
• Must have educated view of winning strategy
• Organizational assessment
• Clear long-term picture of toughest short-term
  and long-term challenges and what organization
  must do extraordinarily well to win.
• 2. Development of Ideal Candidate Profiles
  Profile for Success
• Proven business competencies totally aligned
  with strategy and toughest challenges
• History of successful experiences aligned with
  challenge.
• List of personal leadership qualities that match
  qualities of other successful CEOs in similar
  situations
• Where is ideal candidate?
• Targeted research on companies known to have been
  successful in areas that match companys
  strategic challenges.

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PICKING THE RIGHT CEO - 2

• General discussion inside versus outside.
• How much change is necessary?
• Value of benchmarking
• 5. Use of Search Firm
• Key selection criteria
• Reputation history of success in similar
  searches
• Knowledge of industry
• Blockage from target companies
• Trust and chemistry with consultant who
  would conduct the search as well as time
  availability
• 6. Identification and elimination of barriers to
  success
• The performance difference between attracting
  star versus an average CEO is high. Enormous
  attention should be taken upfront to break down
  the internal barriers and search for a star.
• Candidate assessment and seduction

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ASSIMILATION

• Board responsibility extends beyond selecting new
  CEO. A formal mentoring program must be put in
  place to ensure CEO is successful. Program to
  include
• Art of Taking Charge be sure CEO is exposed
  to Best Practices
• Establishment of clear board goals and
  expectations process should involve full board
  and CEO.
• Board/CEO communications formal discussion of
  board expectations this would include
  clarification of what decisions board
• wants to approve or just be informed
• Assignment of board mentor to ensure that in
  early stages of transition, maximum efforts are
  made to integrate CEO and family into community
  and corporation

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If you as a Board were forced to focus on one
topic on behalf of shareholders, what would it be?

• Compliance issues / Sarbanes-Oxley
• Financials and budget reviews
• Business unit presentations
• Strategic discussions
• Leadership and talent

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What percentage of your Board time, energy and
focus is dedicated to this priority?Past
_____?Future _____?
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If I have convinced you that Leadership and
Talent matter.What is your Board going to do
differently tomorrow to ensure you make a
difference?