Why succession planning for managing board positions is an essential element of risk management within the company and what supervisory boards need to be aware of. A discussion with the hkp/// group experts Dr. Jan Dörrwächter and Frank Gierschmann.
Dr. Dörrwächter, Mr. Gierschmann, why is succession planning for Management Board positions currently seen as such a vital task for the supervisory board?
Dr. Jan Dörrwächter: In Germany’s two-tier board system, the Supervisory Board has three fundamental responsibilities: oversight of the Management Board, providing support and advice to the Management Board regarding topics addressed (particularly with regard to strategy), and the selection, appointment, and dismissal of members of the Management Board, along with their compensation. As expressly mentioned in the German Corporate Governance Codex, the latter task area (responsibility for personnel matters) includes working with the Management Board to ensure that it has long-term succession planning.
Accordingly, if the Supervisory Board is to fulfill its tasks effectively and efficiently, it is crucially important that Management Board vacancies be filled promptly.
Frank Gierschmann: Yes, and it is therefore advisable to define a structured process for identifying and preparing potential successors for Management Board positions. The prime objective of the succession planning performed by the Supervisory Board is to minimize the succession risk of Management Board positions.
What fundamental principles typically apply for succession planning?
Frank Gierschmann: Succession planning generally involves four steps. In the preparation phase, fundamental questions are clarified, such as the precise positions and other relevant conditions. In the next step, candidates are nominated as potential successors for the defined positions—typically by the Supervisory Board, but sometimes by the Management Board itself, predominantly by the Chairman of the Management Board. The Supervisory Board then validates the nominations: the nominated candidates are reviewed in terms of how well they fulfill the defined requirement criteria for being appointed to the corresponding Management Board position and a shortlist is thus drawn up.
Dr. Jan Dörrwächter: On the basis of this preselection and by comparing the requirements for the particular board position with the candidate profiles, targeted development measures for internal candidates are planned and implemented. An ongoing check of the effectiveness of the succession planning completes the overall process and allows it to be continuously optimized.
What is the most effective way to structure succession planning?
Frank Gierschmann: The outcome of succession planning is an overview of candidates who could be appointed to a vacant Management Board position at defined points in time. To reduce complexity, it is advisable to define categories for the successors. In many companies, a three-category system has become established: candidates who could fill a position immediately or in the short term, those who could do so within a time frame of up to 12 months, and those who could be considered for a position in the long term, in the coming three to five years.
Dr. Jan Dörrwächter: The definitions of the categories must be formulated on the basis of the general objectives and the orientation of the succession planning: if the succession planning is focused on developing the internal staff, this should also be reflected in the category descriptions. The definition should, for example, clearly state what development steps are needed in order to gain a position on the Management Board. If, on the other hand, the focus is on the specific succession or on risk management, it is advisable to provide a timeframe for the succession categories, as described.
Should succession planning always include external and internal candidates?
Frank Gierschmann: In our view, yes. Otherwise too much potential goes to waste.
Dr. Jan Dörrwächter: Even if internal or external filling of board positions is preferred for strategic reasons, Supervisory Boards should fundamentally remain open to both options.
Internal candidates generally have a deep knowledge of their own organization and its critical processes, can make use of personal networks within the company, and thus can very quickly find their feet in their new position. A major advantage!
Dr. Jan Dörrwächter: It does indeed seem that the risk of filling the position with the wrong person, in terms of their technical or cultural skills, is limited in the case of an internal candidate. The advantages of internal candidates may in some cases not be positive, however. For a radical new beginning, experience has shown that external successors are needed in the Management Board who can take new approaches and break up restrictive structures and networks, unburdened by decisions made in the past.
Frank Gierschmann: Another reason to include external candidates in succession planning, for example, is that there may be too few people with the right profile within the organization. Small-scale businesses relatively often face the problem of not having enough internal candidates available who have been sufficiently prepared when a vacancy occurs in the Management Board. The reverse is also not uncommon, however: high-potential candidates can reach the point that they are ready to join the Management Board but there are no suitable vacancies, and then leave the company.
Dr. Jan Dörrwächter: External candidate profiles can be brought into the succession planning primarily by the members of the Supervisory Board, but also by members of the Management Board. If an external recruitment consultancy is used, suitable candidates should be contacted for the company on the basis of a defined search profile.
How do the benefits of succession planning manifest in the event of a vacancy being filled?
Frank Gierschmann: When a position in the Management Board becomes vacant, multiple sources should be used to fill it, as mentioned. When a vacancy occurs, in each case a process should be defined that firmly anchors consideration of the succession list in the recruitment process.
How well acquainted should Supervisory Boards be with the succession planning, or more precisely with the specific candidate list?
Dr. Jan Dörrwächter: There is no doubt that it is helpful for the Supervisory Board to know the content of the succession list. Panel members should ideally have some idea of the internal candidates before a vacancy occurs so that they can assess how suitable they would be for a Management Board position. This can be done, for example, in regular personal interviews or presentations in the panels.
Frank Gierschmann: In this context, it has been shown that members of the Supervisory Board know roughly half of all direct candidates in the recruitment process for Management Board positions.
Should knowledge of potential candidates extend even further?
Frank Gierschmann: This is something we would certainly recommend. Supervisory Boards should not be afraid to contact highly talented people in management levels below the Management Board. There are, of course, limits to this. But in addition to the Supervisory Board’s own knowledge, the motivating effect that this type of contact can have on the promising staff should not be underestimated. This contact is an important building block for the credibility of the internal recruitment processes—which should, of course, be emphasized in the recruitment itself.
Dr. Jan Dörrwächter: Ideally, the succession planning for Management Board positions should be linked to that of the management levels below, to provide comprehensive insight into the development of talented people in the company and to allow vacancies to be filled promptly when an internal candidate is moved up into the Management Board. This is another example of just how important it is for the Management Board and Supervisory Board to work together in succession planning.
Mr. Gierschmann, Dr. Dörrwächter, thank you for talking with us!