External stakeholders, particularly shareholders, recognise the importance of effective succession planning as a bedrock of a company’s sustained success.

Successful boards understand that succession planning forms a vital part of good corporate governance. The 2018 UK Corporate Governance Code (the Code ) underlies this importance.

Principle 1A of the Code provides:

‘[a] successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society.’

Principles 3 J, K and L of the Code address the importance of succession planning and Provision 17 provides:

‘[t]he board should establish a nomination committee to lead the process for appointments, ensure plans are in place for orderly succession to both the board and senior management positions, and oversee the development of a diverse pipeline for succession.’

Good boards have strong succession plans

Failure by a board to ensure that a company establishes effective succession planning puts performance of the company at risk and leaves the directors open to criticism.

In the financial services sector failure to properly plan for succession can leave a firm open to regulatory sanction, the Prudential Regulation Authority ( PRA ) states that it:

‘Expects boards to pay close attention to the skills, experience and effectiveness of its members. Boards should ensure they have robust succession plans that recognise current and future business needs and requirements. ’ [1]

Board directors should always expect the unexpected, such as Illness or the sudden departure of a key executive. The PRA expectations on this point are clear:

Boards should maintain succession plans that address the unexpected loss of key individuals, particularly those roles covered by the Senior Managers Regime including arrangements covering immediate and short-term situations as well as longer term replacements.

Companies with well-developed and regularly updated succession plans will typically be better placed to mitigate the impact of the sudden loss of either a senior executive or a key non-executive.

Managing relationships

Refreshing executive leadership can be particularly challenging for boards. A strong succession plan coupled with clearly understood expectations as to performance may help to mitigate the difficult challenges for a board when it seeks to move on a senior executive who it considers is underperforming. However, managing succession against a backdrop of under-performance, or where there are differences of strategic vision for a company, is unlikely to be straightforward.

Typically, a board is a relatively small unit and relationships can be close, concepts of loyalty and friendship can make challenge and change difficult. Understandably, Individuals can, and often do, see succession in purely personal terms. It can be hard for an individual to be objective when he or she is the subject of direct or implied criticism, particularly where acceptance of such criticism is likely to result in significant consequences.

Plan early

Companies can mitigate the risk of destructive and time-consuming succession crises by developing and updating detailed succession plans as part of the day-to-day functioning of the Board, supported by the nomination committee and internal company resources, rather than when a crisis has already hit. Constructive challenge by non-executives can help to ensure that succession plans are fit for purpose and are updated regularly.

The Chair

As the guardian of the company’s corporate governance the Chair plays an important role in helping to ensure that there are effective succession arrangements in place. The Chair should be a sounding board for non-executives, informal views on more sensitive issues between non-executives and key executives will often pivot through the chair. The Senior Independent Director should also ensure that he or she is available to discuss the concerns of the non-executives.

Where the Chair has his/her ear to the ground there is a greater chance that concerns about succession will be picked up early which should allow the issue to be exposed for wider discussion both informally and more formally at the Nomination Committee as well as at main board level.

[1] Supervisory Statement SS5/16 Corporate governance: Board responsibilities July 2018 – Prudential Regulation Authority