2.5.9 Succession; formal; board as a whole

Having good board members is essential. Having the board work as a team is vital. Succession planning, orderly nomination and proper dismissal are important strategie tasks of the board.

Main Principle A.4 of the Combined Code of 2008 and B.2 of the UK Corporate Governance Code 2010 state that there should be a formal, rigorous and transparent procedure for the appointment of new directors. Six code provisions follow. This reflects the findings of the Higgs Review, which considered that the procedure was much too informal and often involved solo actions by the CEO or chairman. The whole board should be involved after the important preparatory work by the nominations committee. A majority of the members should be nonexecutives. The chairman should chair the nomination committee,1 except in case the nomination or dismissal of his own position is onder consideration. This is why there should be a senior independent director (SID).2

"Succession is a sensitive matter and should not be lelt to conversations in the corridor. It should be on the agenda of the nominating committee at least each half year. At least then the discussion takes place."3 Dunne states that a change of board members can create disharmony, because it is a deeply personal thing and touches ambitions.4 "Therefore, the more planning the better. The committee should report regularly to the complete board on the matter."5

"The complete board should nominate all members of the board. The complete board should also nominate the chairman and the CEO. This recommendation is important in improving board effectiveness. It moved the appointment of NEDs away from the patronage of chairmen and the club-like approach to board membership. If a director feels he owes his position to the chairman, he loses a degree of independence. By involving the board as a whole, all directors share the responsibility of choosing their colleagues. Formal process means searching for those who will add value to the board team or fill gaps in it."6

Selecting a chairman requires forward planning. Preferably the chairman should be chosen from the existing NEDs, because if a chairman is selected from outside he will not know the business and may have difficulty in forming a tandem with the CEO, i.e. in being able to counterbalance the CEO. It will also be easier to decide whether the CEO and the potential chair will get along well. Good planning is to identify two NEDs as possible chairman to be prepared for any eventuality.7

The first step to remove a chairman can come either from within (i.e. from board members) or from without (i.e. from shareholders). In both cases the senior independent director should be approached and should then discuss the issue with the other board members.8 Private pressure is likely to lead to a better outcome than public clamour.9 An example is the decision of the Standard Chartered Bank Board, chaired by Sir Patrick Gillam, to replace their CEO Rana Talwar. A newspaper reported:

The central responsibility of NEDs is not sitting on audit committees or acting as monitors, it is taking the necessary decisions to ensure that leadership of their company is in the right hands.11

The succession of the CEO and other executives is important as wel!. Companies should have training and succession plans. It is a good thing if the CEO rises from within. If the nomination committee is to have influence there, it should know a good number of senior managers. For this reason it is advisable for senior managers to regularly attend board meetings and make presentations there and for NEDs to visit subsidiaries.

Institutional investors deem succes sion important. Hermes, a large UK investment fund that buy about 1% of the shares in large listed companies and seeks to have regular dialogue with the companies, says that in one-on-ones with the board they discuss one-third strategy, one-third remuneration and one-third succession.12

I believe that forrnalities and regular forma! discussions in the nominations committee about succession are a good way to avoid CEOs and the chairmen to have too much influence on succession. It is a good example for other countries to be forma! about the forward planning on nominations. For the Netherlands I propose that boards discuss annually how they will internally deal with succession.