Evaluating Board Composition Through Succession Planning & Disclosure Processes

As organizations grapple with multifaceted challenges and innovations, they are taking a closer look at their boards. To ensure boards are well equipped to navigate current markets, organizations are reassessing board composition and culture, and the existing tools and processes for monitoring them. Rigorous board evaluations have become more important, providing a better understanding of alignment between the board's composition and organization's strategy. The following explores why boards should consider adopting constructive board succession planning practices and diligently prepare for board composition disclosures—and how board evaluations can help.

Solidifying Succession Planning and Why It Matters

According to findings from the Nasdaq 2023 Global Governance Pulse survey, out of 78% governance professionals who indicated their boards have a succession plan, only 42% reported the plan is formalized and reviewed regularly by the board or a delegated committee. This data seems to overstate the formality of many boards’ practices or conflate a board skills matrix with a formal succession plan. “A robust succession plan is not something I see often among directors like you typically see with a CEO. This includes having identified candidates matched with identified directors, timeframes, and more. It is a minority practice,” according to Carolyn Frantz, Co-Head of ESG Practice at Orrick Herrington, who shared insights during Nasdaq’s 2023 Governance Pulse Forum.

A formal board succession plan has multiple facets. It starts with an in-depth analysis of current board members’ experience, expertise, diversity, the board’s role and fiduciary duties, and the organization's strategic goals and business model. Then, a robust succession plan considers and implements training needs and development opportunities for the board. Ongoing education, especially on emerging trends, risks, and regulations, can help contribute to high-quality and independent oversight.

Additionally, the board succession plan uncovers how board members contribute to the boardroom culture and dynamics. This may be best achieved through an objective and thoughtful board evaluation process that provides insight into board members’ preparedness and contributions to the board’s overall effectiveness. Understanding board members’ impact on the board’s performance correlates to tenure considerations, which is the next major component of a robust and formal succession plan.

Understanding the average board tenure and its formal requirements supports informed decision-making about succession planning and refreshment processes. Boards may benefit from balancing the need for refreshment against maintaining board stability. Succession planning can be iterative, intentional, transparent, and multi-faceted to ensure the board is fit for purpose and reflects positively on the organization.

Disclosing Board Composition

Disclosing board composition typically begins with a thorough analysis of each board member’s skills and experiences to help identify relevance to the board's roles and responsibilities. "One of the biggest determinants of a successful board that adds both fiduciary value for shareholders and strategic value for the management team is board composition. It’s challenging to do what you need to if you do not have the right people in the room with the right skillsets and attitudes,” according to Meghan Juday, Chair of Ideal Industries, who shared insights during Nasdaq’s 2023 Governance Pulse Forum.  

Viewed as the top opportunity to enhance the board’s succession planning practices, 22% of governance professionals emphasized the importance of establishing a list of prioritized characteristics and competencies, such as skills, background, or experience, according to findings from the Nasdaq 2023 Global Governance Pulse survey.

Organizations typically disclose board composition in their proxy statements. Proxies provide stakeholders with pertinent information to make informed decisions about the organization. Board composition disclosures help stakeholders uncover the organization’s governance structure by including information about board members’:

• Career history, education, and qualifications
• Professional credentials and salaries
• Backgrounds, nationalities, and ethnicities
• Board and management roles
• Skillsets aligned with the organization's goals and stakeholders’ interests

Organizations and their boards may benefit from determining how board members acquired their skills, rather than just listing areas of expertise. In addition, understanding whether a board member’s experience was from occupying a board seat, executive role, or leadership position provides valuable context. In addition, understanding organization size and industry where those roles were held may also be helpful context.

Moreover, when considering shareholder and regulatory expectations, it may be helpful to shed light on how the board's diversity, skills, and experience align with the organization’s strategic objectives. These disclosures may not only help meet regulatory requirements, but also signify the organization’s commitment to good governance practices.

Addressing and Assessing Skills Gaps in the Boardroom

Board evaluations play a pivotal role in addressing gaps across board skills and experiences. An effective evaluation process is key to driving board engagement. But only 7% of governance professionals indicate their board evaluation process results in specific action plans to address opportunities, risks, and weaknesses, findings from the Nasdaq 2023 Global Governance Pulse survey. Developing an action plan based on board evaluation results is an important step to address the identified gaps, but equally important to ensure board members are engaged around implementing those actions. The goal is to form a cognitively diverse board capable of preventing groupthink and understanding stakeholders’ needs.

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The Nasdaq Board Advisory team works with boards to help foster a culture of continuous improvement and strategic alignment through customized evaluation processes. To learn more, visit Nasdaq Governance Solutions Board Evalutions.