Leadership 2.0: Board Succession
On Board

• Lori Chordas
• February 2019
• 

Key Points

• Across the Board: Workforce dynamics are changing and so too must corporate boards.
• Young Blood: Younger directors are gaining more of a foothold in the boardroom, bringing technology skills and currency to their roles.
• Getting the Job Done: Insurance boards are also embracing diversity and experience to influence change inside their organizations.

Organizations and institutional shareholders are now demanding a younger presence at the boardroom table.

They're vetting “next-gen directors” who have an invaluable digital skill set and perspective on areas such as digital marketing, e-commerce and cybersecurity, said Julie Daum, who leads the North American Board Practice at Spencer Stuart, an executive search and leadership advisory firm.

Statistics bear that out. More than one-third of directors appointed to a Standard &Poor 500 board in the past two years lacked experience as a public company director, according to the 2018 U.S. Spencer Stuart Board Index. The report examines the latest data and trends in board composition, board governance practices and director compensation among S&P 500 companies.

This year more than half of new directors at those organizations will be stepping into the boardroom for the first time, said Daum, who has conducted more than 1,000 board member assignments for companies such as Whole Foods, Amazon, Nike and numerous spin-off boards.

Technology, globalization, regulation, management turnover and other business disruptors are driving big changes in the boardroom and prompting the need for agile boards with the expertise to navigate those evolving threats and opportunities.

The unprecedented pace of change is also “reshaping” the way companies are addressing board succession, Daum said.

No longer is a CEO or individuals with prior board experience a must-have. Companies now are seeking director candidates with a new type of talent and a different perspective, she said.

Diversity is also increasingly becoming part of the board succession planning discussion.

For the second consecutive year, women and minorities compose half of the incoming class of S&P 500 directors, according to the U.S. Spencer Stuart Board Index.

Best's Review talked with Daum about what steps insurers can take to plan a strategic approach to board succession and the need to cast a wider and deeper net to identify qualified candidates.

What trends are you seeing around board succession planning today, and how has that process recently changed?

Boards have traditionally relied on retirement age for refreshment, waiting until someone reached mandatory retirement age to replace them.

The most common mandatory retirement age is 72, set by 43% of S&P 500 boards with a retirement age requirement.

Today's boards recognize that the world is rapidly changing and there's a need for new skill sets in the boardroom.

While wisdom is needed in the room from people who have served on boards for a while, you also really need people who understand the current competitive environment.

It's important for insurers to think about board composition and to have a plan in place that includes identifying necessary skill sets and comparing that to those already in place on the board. The board must have a mechanism to ensure board refreshment, pinpoint talent shortfalls and a process to fill in the gaps. Also, boards must evaluate the contributions of the sitting directors who have to ensure their skill sets are still valuable.

Today, there's a larger focus on what skills companies need in the boardroom and how they can get those. That has to be an annual conversation rather than a discussion that arises only when a board opening is available.

What are some of the new skill sets desired by boards today?

Boards are looking for people with technology backgrounds; who have been through transformation and disruption; who understand how to interact with customers in many ways; and, depending on the board or company, have global experience.

It used to be that every board looked for CEOs of companies of the same or larger size. But now companies recognize that they need people with technology, data analytics and digital experience as well as other skills. They need people who are active, not retired, and who will be staying current.

Also, financial talent remains a priority. Boards continue to be more focused on recruiting financial experts with experience as CFOs or investment professionals, and less interested in accounting and banking backgrounds.

What should insurers now be thinking about when planning for board succession? How can insurance boards take a more strategic approach to planning for their own succession?

The first thing is to take a step back and ask, 'In an ideal world what is it we need in the room?' If you had a blank sheet of paper, how would you design the board? You should periodically review the skills and experiences of the current directors to identify potential gaps. Finally, prioritize the skill sets you need. For example, it might be nice to have someone with global experience, but it may not be a mandatory requirement.

What trends do you see around the rise of the “next-gen director”? How is that young talent bringing a different approach and perspective, along with a more diverse voice, to the role?

There isn't much board turnover in the United States. In fact, the rate at which S&P 500 board seats turn over is quite slow at only 8% in a given year.

We are slowly seeing younger people come into the room. Last year, 17% of the incoming class of S&P 500 directors were age 50 or younger. And about one-third of new directors last year never served on a board before.

Companies need to bring in new voices and people with different sets of experiences. On the other hand, younger people don't have board, and as much executive, leadership experience so it might take them awhile to understand the role of director. They will have a learning curve, but they do bring currency to the board and a new perspective on reaching customers.

Today, insurers are increasingly moving online to reach customers. That's different from the traditional approach of relying directly on brokers to make those connections. This new approach requires new skill sets, such as tech-savvy, digital experience, that probably never existed on the board because there wasn't a need for it in the past.

What are companies looking for from these next-gen directors in terms of knowledge about technology, digital transformation and social communication?

That's really where companies are looking to these younger individuals. Insurers in the past looked for individuals with insurance experience, perhaps someone older who held many different jobs in the industry. But if boards really want to understand how to interact with today's customers, they need to look at someone younger, perhaps someone who may not even know anything about insurance.

While boards can largely benefit from bringing in younger directors, what else must insurers do to prepare those directors for success through onboarding, integration and an open-minded attitude toward their contributions?

Boards concentrate on the recruitment process, which can be difficult and time-consuming. But today there is also a greater need for a thoughtful onboarding process to help young directors get smart about a company, get to know other board members and the management team and to have someone on the board who acts as a mentor or buddy to help them understand how the board operates. That's quite different than how it used to be done when there was very little orientation for new board members. New members just sat down with a CFO or CEO and off they went. But now there's a recognition that more time and training is needed to bring a new director up to speed as quickly as possible.

What should future young directors do to take the initiative and shape a program to help them get inside the business?

They need to spend time getting to know the industry and the company, its strategies, challenges, products and services, key customers, major investors and the culture of the board. For example, someone moving onto the board of a manufacturing company should do a site visit. A new director in the insurance industry could attend an industry trade show or a carrier's annual meeting for its top producers. It's important for young directors to educate themselves quickly about the business.

What potential challenges are companies now contending with when it comes to board succession planning, and what's needed to overcome those hurdles?

One challenge is the tradition on most boards that directors stay on the board until they hit retirement age. Boards need to change the conversation and evaluate their board to make sure people are relevant and contributing. If a company brings on a 45-year-old director with digital experience, is it realistic to think he or she will stay on the board for 30 years until retirement age? Of course not. So boards need to start having those conversations with all directors to understand how long they plan on staying on the board, and evaluate if they're contributing to the post and have the necessary skill sets going forward.

Are boards still faced with pressure about gender diversity, and what should companies do to address those concerns?

It's amazing that we're even still having this conversation in 2019. But institutional investors have shone a light on this issue because companies with diverse boards perform better.

For the second year in a row, women and minorities made up half of the incoming class of S&P 500 directors.

And women are assuming more board leadership roles. Women now chair 20% of audit committees, 19% of compensation committees and 24% of nominating/governance committees, according to Spencer Stuart's U.S. Board Index.

Diversity should include gender, ethnicity, age and global experiences. Spencer Stuart's recent U.S Board Index found 13% of new independent directors were born outside the United States, compared to just 8% in 2017. And 32% of directors have global professional experience, which is defined as having worked at an international location.

What role does technology play on the board, and should companies have a technology or digital expert in the boardroom? What is the board's role in driving innovation?

It depends largely on the business. I think many boards believe they need someone who has a technology background, but that may mean different things to different companies. For example, it could be someone who knows how to use technology to reach customers or someone who is proficient in areas like digital marketing, artificial intelligence, machine learning or cybersecurity.

A board seat is valuable real estate. So it's important to make sure you understand what an individual can contribute.

Is the pool for traditional board candidates shrinking? How is that opening up the door for talented individuals to position themselves for board service?

In the past, CEOs served on multiple boards but now less than half serve on one. This opens up the boardroom.

Now people who weren't in boardrooms have an opportunity to serve. And when you are looking for digitally-proficient, younger directors no one in the boardroom knows them. The door is opening up for a new group of individuals.

How can companies identify and recruit those talented new directors to their boards?

Boards should be clear about what they want and proactively define and communicate the skill sets and expertise that are important to them. They need to cast a wide net and not just look around the room and ask, 'Does someone know anyone who looks like this?' Look for people who are the best at what they do, not necessarily just those known by other board members. That's a big shift.

Boards have always felt comfortable recruiting someone they know. Now boards recognize that just because you don't know any 45-year-old technology-skilled candidates doesn't mean you can't interview unknown prospects and select the best one. That's a new mindset.

How is Spencer Stuart helping companies with that process?

We are hired by boards to help them define the criteria for what the ideal director looks like and then identify individuals who meet that criteria. We work with boards to interview potential candidates and select the ones who fit culturally and have the necessary skill sets.

Last year, nearly half of our board placements were women or minorities. Diversity is something we value.

What is the future outlook for board turnover and board appointments, and will the pace of director retirements increase? Will we continue to see new faces in the insurance boardroom?

U.S. boards are aging and that inevitably will spur more retirements. Today, the average age of S&P 500 directors is 63—two years older than a decade ago at 61.

I expect to see more turnover in boardrooms, and boards will need to start thinking about turnover in a different way.

We'll continue to see people serving on boards for shorter tenures, which will enable boards to continually update skills in the room. That will be a big change as companies will be constantly adapting to a changing world.

I also expect there will be different kinds of people coming in and out of the boardroom versus the old style of having senior statesmen on the board who join and stay for decades.

In insurance, there will always be a need for people who understand the business. Insurance isn't intuitive, and industry expertise is critical.

It's important to remember that boards can be a strategic advantage for an organization. Companies need to constantly be thinking about how to create that advantage and create a road map for future board succession.