This is the third installment in the Year in Governance Series from the In-House Subcommittee of the ABA Business Law Section’s Corporate Governance Committee. Each month, the series will share key tips on a different corporate governance topic. To get involved in the Corporate Governance Committee, please visit the committee’s webpage.
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Boards are dynamic, and having a reasonable level of director turnover is healthy and expected. Regular board evaluation and succession planning are essential and complementary processes to maintain a board that is relevant and effective over time. Taking a strategic approach and a long-term view can also protect against block turnover, which can be disruptive to board effectiveness.
- Strategy drives board composition. A company’s regularly refreshed strategy should determine what skills and capabilities need to be represented on the board. Some skill requirements are (or are becoming) universally essential (e.g., financial, executive leadership, and technology experience). Some may be critical depending on company strategy (e.g., regulatory, geopolitical, digital, M&A, or industry expertise). The list of desired skills and experience should be refreshed periodically and should be a metric against which board composition is assessed, ultimately driving future recruitment.
- Get full board buy-in. It is important that all directors understand and support the “skills matrix” and how its elements are assessed (e.g., how much experience is required to substantiate that a director has a particular qualification). Such buy-in is critical if use of the matrix might result in a long-serving director not being renominated because their qualifications are no longer a high priority. Be clear with directors that substantiation criteria will be applied rigorously and that it is not expected that directors will “check all boxes.”
- Design board evaluation to maximize its value. Practice varies in how board evaluations are conducted—whether in writing, such as via a portal; through an interview led by, for example, the lead director, the general counsel, or an outside advisor; or through a combination of written responses and interviews. Consider which approach would elicit the most candid and useful input from directors. What is appropriate in normal times might be different from what is appropriate in times of transition or crisis. It is important that directors trust the evaluation process, which includes knowing who has access to the results and how the results are used.
- Evaluate the board comprehensively. Beyond director qualifications, the board evaluation should examine board structure (including committee structure), composition, leadership, agenda relevance, communication, meeting conduct, quality of materials, quality of discussions, cognitive diversity, and other factors relevant to whether the board is functioning well to support and oversee the company. It is a good idea to have an activism advisor critically assess the board’s vulnerability to an activist asserting that the board is deficient.
- Individual director evaluations are important. Even if a director brings important skills and experience, if they do not participate constructively, the company is not best served. Individual director evaluations provide a structure for peer directors to provide feedback on one another. Care should be taken to design and use these evaluations in a way that does not create vulnerabilities or discord. With universal proxy, activists can target individual directors for replacement. This makes rigorous evaluations even more important, but activists’ work is made easier if they’re able to access records of critical feedback on targeted directors, particularly if no action was taken to address the criticism.
- Track planned turnover. Many companies have term or age limits on director service. It is good to track planned retirement dates when planning for committee rotations, committee leadership changes, and board needs for essential skills or qualifications that might be lost when directors retire. In addition, think through scenarios for different directors departing at different times; this helps avoid a gap in committee or leadership coverage.
- Anticipate unplanned turnover. For various reasons, directors might leave the board in advance of mandatory retirement. Some such departures can be anticipated via candid conversations among directors, whereas other departures might be unexpected. At least annually, the chair or lead director should inquire about the tenure goals of each director so that those individual goals can be incorporated into succession planning.
- Plan ahead for committee composition and leadership as well as board leadership. Strong leadership at both the committee and board level is essential to overall board effectiveness. Refreshment planning should consider succession in key leadership roles as well as periodic rotation of committee service for all directors. Candid conversations with directors about their leadership and committee assignment interests helps avoid surprise or misunderstanding. Be cognizant of director independence requirements for certain committees when planning.
- Leverage outside advisors. Search firms can be valuable resources for identifying future directors with particular skills and capabilities, and they have access to word-of-mouth information about how candidates conduct themselves in the boardroom. Since recruitment can take time, it may be helpful to have external experts help you stay current on potential candidates. To go one step further, companies can keep a “bench” of candidates that have already been interviewed and are ready to step in if the need arises.
- Be flexible. The “supply” market for board candidates is as dynamic as the “demand” market. If a well-qualified director becomes available, it might be wise to increase board size to bring them aboard ahead of when the need arises, particularly if a subsequent vacancy is foreseen.
The views expressed in this article are solely those of the authors and not their respective employers, firms or clients.
