Accelerated development of high-potential board talent is essential for organisational sustainability and to support the appointment of independent non-executive directors in compliance with ever more stringent corporate governance requirements.
“Shorter tenure of non-executive directors means we can no longer rely on long-standing board members to provide counsel and guidance,” says Sandra Burmeister, CEO of the Landelahni Recruitment Group. “We must develop new talent faster to ensure a pool of skilled non-executive directors for the future.
“Globally, extended fiduciary responsibilities and a changing governance framework are making it undesirable, if not impossible, for board members to hold the same number of board seats as they have in the past. In South Africa, the growing accountability of directors under the new Companies Act and King III means they are taking on fewer board roles.”
Over the past few years, there has been a substantial reduction in the number of board members holding three or more seats. In 2008, 89% of directors on the JSE Top 100 held one board seat only, as do a similar proportion of FTSE Top 100 directors.
Boards seem to be increasing in size by two or three people so as to balance ‘interested parties’ with independent non-executive directors. In the UK, this is as a result of increasing pressure from the FTSE ISS Corporate Governance Index.
“The risk to independence is exacerbated in SA with the practice of appointing black shareholders to the board as non-executive directors as part of black economic empowerment transactions,” says Burmeister. “By virtue of their shareholdings they are ‘interested parties’ rather than independent. The average size of boards on the JSE is 13, but companies with substantial BEE transactions average 15 board members so as to ensure independence.”
Of the FTSE Top 100, in 2009, 61% of companies (compared to 53% in 2008) had only one or two executives on the board, usually the CEO and CFO, with the remainder being non-executive directors.
“Ensuring continuity and planning for succession to ensure optimal functioning of the board is one of the most crucial duties of the chairman today, says Burmeister. “With more ‘first timers’ being appointed to boards than ever before, the accelerated development of board talent is becoming particularly important.
“Developing board talent takes time and, like developing executive talent, needs to be done consistently. This requires a focused and ongoing succession and development plan to identify and develop board members with high potential. In the United Kingdom, of the 23 new FTSE 100 directors appointed in 2009, 14 had not previously held FTSE 100 directorships. Several of the FTSE Top 20 boards have launched formal coaching and development programmes for new board talent.
“The world is becoming an increasingly more complex, demanding and connected environment that requires a more sophisticated set of board competencies and processes to better manage the challenges faced by companies,” says Burmeister. “Boards would do well to evaluate, every few years, the relevance of existing skills to support the strategic direction of the company, and then to implement a rigorous and transparent non-executive director appointment process to hire additional key skills.”
International research indicates that boards with diversity – in terms of skills, experience, race and gender – are more successful. US research house Catalyst indicates that Fortune 100 and Fortune 500 companies with a higher percentage of women board members perform better financially than all-male boards – even ethnically diverse all male-boards.
In 2009 66% of FTSE 100 directors were UK citizens, with the balance holding European, USA and Canadian citizenship. The FTSE 100 boards with a higher diversity in terms of gender and ethnicity were larger on average by two people. By contrast, of the JSE 100, 94% of board members are South Africans.
“It is important to broaden sources of talent by casting the net wider in regard to experience, skills and geographies,” says Burmeister. “Evolving corporate governance best practice dictates that board directors need to possess not only outstanding technical skills, but also extraordinary personal qualities and commitment.
“Increasingly, boards are developing sophisticated recruitment and selection processes to develop a broad pipeline of top quality board members with a diverse range of skills, abilities and insights – as well as ethnic and gender diversity – to meet globalisation demands.
“There are several global models for board succession and development. In Australia, for example, alternative directors are frequently appointed. They attend all board meetings so as to build skills and knowledge of the business and strategic issues over a period of time and are able to take over seamlessly as existing board members retire from the board. There is an excellent pipeline of experienced board members that are not on Top 100 boards.
“Top 100 companies may appoint two or three additional board members with high potential a few years prior to existing members’ end of tenure and support their growth through formal coaching and mentoring so as to develop the required skills and company or industry knowledge. Encouraging your own executive team to sit on the boards of non-competitive companies or not-for-gain organisations is also a good way to build future board skills.”