UK’s Financial Reporting Council provides feedback on succession planning consultation

Achieving greater board diversity to improve company performance was the most pressing concern of respondents to the UK’s Financial Reporting Council’s (FRC) succession planning consultation.

The FRC’s feedback statement on the consultation found that respondents believed that boards as a whole should be better informed about the link between diversity, strategy and business value. Diversity should be considered as a broad concept in order to encourage diverse thinking and to avoid the dangers of group-think, respondents believed and there was a view that the “very fact that individuals do not fill ‘conventional’ criteria is likely, of itself, to bring valuable additional perspectives to board strengths.”

Respondents said that boards needed to think more broadly about what is likely to constitute suitable previous experience, both in terms of demographic profile and in terms of previous relevant board experience. There was support for a review of the criteria and the process for identifying candidates with consideration given to the concept of board apprentices. There was also a need to understand unconscious bias and the impact it can have on recruitment decisions, respondents suggested.

It was also suggested that search consultants should be pressed to look more broadly for talent; be given guidance about what is expected; and have the confidence to challenge appropriately where boards do not appear to be open minded to diverse candidates, the FRC said.

Meanwhile the dangers for  boards and their companies of becoming too reliant on one or two individuals and the need for boards to be aware of the risks of this was also raised by respondents. The FRC said the feedback found that the involvement of the chairman and senior independent director (SID) in both shaping a strong board and in underlining the importance of succession was regarded as essential by respondents. Additionally when considering how to achieve a better link to strategy and company culture when considering succession planning the responses suggested the use of skills matrices, including personality-related versions to help with cultural fit, and completing a gap analysis of board requirements.

Investors said they would like better disclosure by companies so that they could understand the nature of the skills and experience a board will need in the future and how the company intends to make this transition. The majority of respondent felt the nomination committee report was the natural home for such information the FRC said. Many respondents said that companies should be able to clearly connect the succession plan and talent development programme to the corporate strategy.

Suggestions were provided for the improvement of nomination committees and the reporting of its work by companies. Suggestions for this included providing information on the committee’s purpose and responsibilities, what it has done during the year and what it thinks went well, with links to specific decisions where possible, rather than just reporting on its terms of reference; disclosing the board recruitment process including information on external advisers, search and selection criteria; and providing greater detail of the process that the committee uses to judge future candidates against the role profile and skills/experience matrix.

There was not much support for public advertising of non-executive director vacancies. The FRC said that the companies who responded said they did not consider it an effective method of recruiting individuals of the calibre, or with the skills and experience, they required. However, there was support for more transparent appointment processes.

The FRC discussion paper had highlighted the benefits of regularly evaluating board performance and said that succession planning should form part of an annual board evaluation. There was support for the setting of objectives at board, committee and individual director levels in order to benchmark to measure performance. Improvements suggested for the evaluation included directors identifying the attributes that they bring to the board thereby enabling the nomination committee chairman to use this to build up a blueprint for the operation of the board and to strengthen it by planning succession at an early stage and formalising the non-executive director induction and linking this more explicitly to on-going development.

Looking forward to how to respond to the feedback, the FRC said it would  consider providing nomination committee guidance as part of the revision of the guidance on board effectiveness, which also forms part of its culture coalition project. For the current reporting season, the FRC said it would  review and analyse nomination committee disclosures – including board evaluation reporting for the FTSE 350 – and comment on its findings in the 2016 Developments in Corporate Governance and Stewardship report.

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