The FRC has called on British firms to consider succession planning as important as overseeing audit and remuneration committees.
“It is clear from our research that the absence of strategic, thoughtful and practical succession planning can be a substantial risk to long-term success,” the FRC said. “It can also be a sign that the company is not sufficiently clear about its purpose, and the culture and behaviours it wishes to promote in order to deliver its strategy.”
The FRCs interest stems primarily from the fact that the quality of succession planning is one of the most frequent issues highlighted as a consequence of board evaluation. The FRC also claimed it wished to address the Parliamentary Commission on Banking Standards recommendations on issues around director nomination, in which it commented that there is a “widespread perception that some ‘natural challengers’ are sifted out by the nomination process”.
At its core, the report maintained that it was crucial to have a plan in place for when a CEO or CFO was unexpectedly unable to continue working or left suddenly.
The importance of finding a replacement for the latter’s role was further highlighted by Bryan Proctor, head of the Financial Officer Centre of Expertise at Korn Ferry, who claimed that as the role and profile of the CFO has grown over the last eight years, boards have become more aware of how CFOs create value for the company.
In an interview with Deloitte in February 2015, Proctor said: “Boards increasing focus on risk has led them to recognise that next to a CEO departure, a change in CFO is the biggest talent risk for an organisation. The recognition of the risks associated with a CFO departure has accelerated recently due to a number of instances in which organisations have been caught flat-footed by an unanticipated early retirement or resignation by a CFO. Not only has CFO turnover increased lately, but so has the proportion of early CFO retirements. Many of those early retirees were not in their roles long enough to fully develop their successors.”
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Proctor suggested that boards are increasingly interested in whether the next CFO has the potential to be a successor to the CEO, to the extent that there is a supply deficit of individuals who can fill these “super-CFO” roles.
He said: “Its not always practical to think the CFO has the capabilities to become CEO, but boards want to have as many options as possible. If an individual being promoted or brought into an organisation to fulfil the CFO role has the potential to succeed the CEO down the road, boards find that attractive.”
Despite the current lack of succession planning, boards are asking for more exposure to the depth of talent on the finance bench. Proctor is of the belief that boards want a better understanding of the assessment and development of internal CFO candidates.
This, he said, was due to boards being more aligned to what the CEO was looking for.
“They tend to be especially focused on what fits with the CEO; how well a candidate complements, yet productively challenges the CEO,” he said. “Then they consider whether the CFO candidate can be a trusted business partner and highly credible with key stakeholders, investors and sometimes customers, as well as with other members of management.
“Boards will also look at CFO candidates abilities to articulate a point of view, both to the board and externally, as a strong spokesperson for the organisation. For instance, whether or not the candidates have experience or exhibit capabilities in managing investor relations and capital markets. And finally, of course, the question of whether a CFO candidate has the potential and qualifications to be a future successor to the CEO.”
According to EY, succession planning is rising up investors’ worry list but is often a process that starts too late.
Ken Williamson, EY partner, corporate governance, UK & Ireland, said: “Investors are also increasingly interested in what talent exists several levels below the boardroom, to ensure there is a sufficient pool of people to draw on when the time comes.
“We are also struck by the lack of transparency in nomination committee reporting. Although the nomination committee looks after succession planning, the whole board should be involved in assessing potential candidates. These interactions can help to establish how boardroom dynamics might work in the future.”