COMPANY boards must better plan in advance for executive and non-executive positions or risk undermining their company’s effectiveness and sustainability, the UK reporting watchdog has warned.
The FRC has called on UK company boardrooms to take the lead in promoting a diverse pipeline of directors and 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 in a discussion paper on the subject.
“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,” it added.
The review has stemmed in part from concerns raised by the Parliamentary Commission on Banking Standards that there is a ‘widespread perception that some “natural challengers” are sifted out by the nomination process.
It will explore how effective board succession planning is important to business strategy and culture; the role of the nomination committee; identifying the internal and external ‘pipeline’ for executive and non-executive directors and the role of institutional investors.
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, commented: “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.”