Succession Planning: A Board’s Blueprint for Stability

Proper board succession planning—the systematic process of identifying and placing qualified candidates in current or upcoming board seat vacancies—is vital for corporate stability and continuity. However, many companies struggle to recognize its importance. Findings from the Nasdaq 2024 Global Governance Pulse survey shows that private companies are half as likely to have a formalized board succession plan in place compared to public companies. And only 28% of all survey respondents believe their succession planning process is effective.

Irrespective of whether the company is public or private, not having a structured approach to thoughtfully select and onboard new directors may result in corporate governance gaps, disruptions, and reduced stakeholder confidence. Well-designed board succession planning practices can help improve board culture, strengthen decision-making, and align board and leadership changes with long-term business objectives. We provide a framework for robust succession planning and highlight why it is essential to have a forward-looking plan in place and how to measure the plan’s effectiveness.

5 Components of Effective Board Succession Planning

Investors and stakeholders value a company that can navigate board changes without setbacks. Transparent board succession planning helps promote investor confidence and mitigate activist intervention and other impacts that may cause business disruptions.

Board succession planning should be directly aligned with the company’s vision for its future. Approaching board composition from a strategic analysis can help keep the board’s aggregate composition aligned with business objectives and ensure that board transitions are seamless and avoid causing reputational damage. 

An iterative, intentional board succession planning process is supported by these five components:

1. Skills assessments. Companies need to regularly review their directors’ skills and experience to ensure that the board’s collective expertise continues to align with business goals. It is important to understand whether the board understands the company and its market and identify directors who can help move the business forward. These needs may differ in public and private companies and across different industries. For example, based on the Nasdaq 2024 Global Governance Pulse findings, public company respondents indicate greater value on cybersecurity and data privacy, and private company respondents prioritize customer relations, strategy, and risk management experience. This type of gap analysis becomes particularly important when a company is going through inflection points in its lifecycle, such as significant growth, expansion to new business areas, or a transition in its corporate status (e.g., entering the public market). These corporate events raise the opportunity to reassess the alignment of board skills to the company’s future direction.
2. A balanced blend of backgrounds. A balanced board helps prevent groupthink and fosters stronger decision-making by incorporating varied perspectives and problem-solving approaches, which helps ensure adaptability and resilience in corporate governance. To date, diversity has been commonly defined through gender, race, and ethnicity for many important reasons, including stakeholder representation. Boards should continue to understand the many facets of diversity, including newly prioritized factors such as age diversity. According to findings from the Nasdaq 2024 Global Governance Pulse survey, 35% of public company respondents prioritize adding new directors who are under 50 years old, which can help boards understand the current and next generations of the workforce and customers.
3. Board leadership and committee makeup. A skills and gap analysis provides boards insight into staffing committees based on experience and expertise, which is important for effective board functioning and meeting regulatory requirements. An advancement in board succession planning practices is determining the appropriate board leadership and committee composition and tenure. According to findings from the Nasdaq 2024 Global Governance Pulse, private and public company respondents indicate that there is an opportunity to determine policies for committee and board leadership rotation. These types of policies help focus board succession planning determinations on the best interest of the board and the company, particularly when decisions arise on matters such as separation of board chair and CEO versus a combined chair/CEO coupled with a lead independent director, as well as committee chairs and members. This also provides a more objective process for determining the individuals who are fit for purpose in roles that significantly influence board philosophy on governance.
4. An optimal board culture. Board composition and culture are interconnected aspects of effective succession planning and board effectiveness. An optimal board culture is not stagnant, and it adapts to the board and company needs. Boards have often assessed director candidates based on cultural fit versus cultural advancement. Directors who view board culture as an evolving, additive, and critical aspect of board effectiveness should assess the board’s cultural evolution based on the addition of new members and the board’s commitment to continuous improvement. Boards that assess culture through the board evaluation and succession planning process evaluate their current culture and how existing and new members can contribute to achieving an optimal state.
5. A proactive pipeline of candidates. Identifying a ready pipeline of qualified candidates ahead of time can help boards appropriately respond to both planned and unplanned transitions. Directors and CEOs should utilize their networks to cultivate a list of known candidates, as well as to leverage recruiters and other third-party resources to expand the talent pool, which can be particularly advantageous when seeking unique profiles. 

Once a board has determined its needs, it can solidify a timeline for how and when a transition will take place. Whether replacing a retiring director with plenty of foresight, accommodating tenure stipulations, or responding quickly to an unforeseen transition, a clear process and timeline can help boards maintain corporate stability.

The Risks of Ineffective Succession Planning

Boards that are not maintaining a forward-looking board succession plan may face short- and long-term consequences, such as gaps in needed skillsets on the board for major board decisions. Below are some other risks and how they may impact the company:

• Cultural misalignment. When directors are not aligned with one another regarding board culture or when board culture is not aligned with the company’s corporate values and risk thresholds, it could lead to a loss of momentum. Boards must be collaborative by nature, even though they should embrace constructive disagreement in reaching consensus. Trust is the foundation of collaborative relationships and may be hard to rebuild if a director is misaligned to the board’s current and optimal culture.
• Activist investors. If activists determine the board is operating without a succession plan or the board is not fit for purpose, then that may cause increased investor uncertainty or a vote of no confidence on the board or certain directors. Investors continue to emphasize the importance of aligning board composition to the company’s strategy and shareholder value. Boards and companies can avoid disruptions from activist circumstances by being proactive and transparent in board succession planning practices and communications of such.
• Stagnation. Stagnant boards may hinder corporate growth if they are too complacent to see that the company is not growing and competing in a way that drives success. In addition, stagnant boards may miss obvious risks or opportunities. Adversely, thoughtful and engaged boards that have goals or policies that require them to be routinely and strategically refreshed may better reflect the skills, experiences, and backgrounds necessary to drive positive alignment with executive leadership and the company’s strategic demands. 

Measuring the Effectiveness of Your Succession Planning

Creating a board succession plan is only the first part of the challenge and opportunity. Executing the plan and then measuring its effectiveness is the ultimate step. Some ways to determine if the board succession plan is effective include:

• Evaluating your board regularly. 79% percent of companies review their full board, including committees, on an annual basis, according to findings from the Nasdaq 2024 Global Governance Pulse. Board evaluations that review a mix of skills, backgrounds, and experiences can provide valuable insight not only into the board’s effectiveness but also its composition for current and future needs.
• Reflecting on recent transitions. Did the board recently complete a transition? If so, rely on board feedback to determine how successful onboarding the new director was and to establish a consistent onboarding strategy. Nearly half of Nasdaq’s 2024 Global Governance Pulse survey respondents indicate a formalized onboarding plan is crucial to enhanced board succession planning. Couple reflections on recent director onboarding, effects on board culture, and impacts on the management team and relationship with the board. Having a holistic view can help with future planning.
• Looking to your peers. What are your industry peers and leading boards doing? Observing how others manage their succession planning processes may provide valuable insight into changes you may want to consider for your own plan. Pay attention to things like board composition, size, and member tenure along with behaviors of highly effective directors based on insights from the Nasdaq Center for Board Excellence.
• Getting stakeholder feedback. Most importantly, weigh the stakeholders’ points of view. Consider investor or owner feedback on the value the board brings in its current composition. Get feedback from the CEO and management team members who interact with the board regularly and ask what value they derive from interactions with the board. It is important to evaluate feedback from regulators on board composition as well.

An effective board is built and maintained proactively. To uncover other key takeaways and practices to help strengthen board succession planning, download the Nasdaq 2024 Global Governance Pulse Report

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The views and opinions expressed herein are the views and opinions of the authors and do not necessarily reflect those of Nasdaq, Inc.