Frank Gierschmann: In recent years, succession planning at board level has become an increasingly significant instrument for risk management. A series of successors, who can potentially take over a board seat, is designated for each board seat. On the other hand: Those who do not maintain a succession plan but only start to search when there is an acute need for action, behave negligently. They miss the opportunity to proactively identify suitable successors and to prepare their appointment in time.
Regine Siepmann: ... because the strategic direction of the company is determined by this. Accordingly, the capital market shows significant reactions to appointments of board members. In times of short tenures of board members and few qualified successors, succession planning is becoming one of the biggest challenges for the supervisory board.
Regine Siepmann: It is one of its most important duties. Because nothing can be so damaging and end up being so expensive as a poorly-appointed board. But this duty is also fixed by regulation: According to the German Corporate Governance Code Point 5.1.2., the supervisory board has to, jointly with the board, ensure a long-term succession plan.
And what do the results of your study show in relation to this obligation?
Frank Gierschmann: The results of our pulse survey show: The main responsibility for the board succession lies, in principle, with the supervisory board, wherein the executive board has more responsibility with the identification or nomination of potential successors. In one in five companies, the HR department is also involved in the nomination process.
Regine Siepmann: The succession planning process generally consists of four steps: Preparation and planning, nomination, selection and follow-up. Essentially, the survey results also show that in around 70% of the companies interviewed, the candidate list of potential successors is updated annually. However, there is no typical process for board succession. And this is also good and ok. Since due to the significant relevance of board succession, it is also essential to direct the process to the company-specific intent and purpose. But it is surprising that in total only 70% of the companies interviewed even have a clearly defined process for board succession.
Frank Gierschmann: It is also interesting that during nomination barely 50% of the companies make a distinction between different types of successors. This may be innocuous in the sense of short and medium-term risk management. But in order to actually prepare for the long term, this is not adequate. In fact, our experience shows that for a long-term succession plan, short, medium and long-term successors must be identified.
Frank Gierschmann: An interesting question on which opinions differ. According to our survey, only 17% of the corporations interviewed inform their potential successors. Obviously, in today’s fast-paced world many groups shy away from arousing false expectations. Since not every nominee will ultimately become the successor. On the other hand, providing information early on firmly planned successors entails numerous advantages.
Regine Siepmann: One of the most significant advantages is certainly the opportunity to be able to prepare the potential successors for the board seat. You won’t find any uniform standard here either. The preparation of the potential successors for the board seat is generally individually tailored to the respective successor and their fields of development. Frequently used offers include for example individual coaching and mentoring.
Frank Gierschmann: No, surprisingly. Only 36% of the companies maintain a success monitoring system according to the survey results. But we generally advise on consequent monitoring not only of the results, but also of the process. Only that way it can be ensured to achieve the succession planning objectives.
Frank Gierschmann: From experience we know that three factors are quite decisive for the success of board succession: Firstly, a close link with the appointment process, secondly a clear connection between the succession plan for the positions of top management and that for the board seats is essential and thirdly, the process and result has to be continually checked.
Regine Siepmann: In addition, we recommend introducing certain standards as regard the process and selection criteria for board succession in order to be able to efficiently identify and fill vacancies with qualified successors. Amazingly, only roughly one third of the companies interviewed currently have predefined selection criteria for potential successors. In light of the increasing requirements on the board and the reform of the German Corporate Governance Code (DCGK) in Point 5.4.1. which recommends the development of a skills profile for the supervisory board to listed stock companies, but it should be expected for skills profiles to also find their way into board succession.