The monitoring and advisory roles of directors are highlighted by escalating corporate uncertainty and diminishing confidence in leaders in the latest phase of the industrial revolution. Nomination committees should thus give due consideration to current and required human capital needs of boards when conducting succession planning, as their decisions have substantial implications for stakeholders.
To investigate board succession planning practices and policies at selected companies listed on the Johannesburg Stock Exchange.
There is an evident need for proactive succession planning that accounts for prudent board renewal and director development to ensure business continuity.
Given the well-developed corporate governance framework in South Africa, the views of eight selected directors were gauged on succession planning by conducting semi-structured interviews. Thematic analysis was conducted to derive themes from the qualitative data.
Nomination committees increasingly account for board composition concerns raised by prominent shareholders. The interviewees suggested that board succession planning is often not formalised. They mentioned that succession policies should be flexible to account for rapid change. Furthermore, the board development mechanisms applicable to executive and non-executive directors differ substantially. Proactive development of the talent pipeline is thus essential.
As heterogeneous boards offer several benefits to companies and their stakeholders, nomination committees should account for diversity considerations when conducting succession planning. Policies pertaining to tenure, diversity and independence should be formalised and annually evaluated and reported on.
Several recommendations are offered to enhance board succession planning, based on the lived experiences of directors in an emerging market.
The fourth industrial revolution (Industry 4.0) brought about considerable changes to human capital that are required by companies to meet their evolving needs, thereby creating ‘a perfect storm’ for strategic workforce management (Whysall, Owtram & Brittain
Researchers who investigated human capital as a competitive advantage largely focused on employees instead of corporate leaders (Khanna, Jones & Boivie
Scholars concur that the experiences and skills of board members can considerably impact their monitoring ability and the quality of advice that they offer (Johnson, Schnatterly & Hill
Similarly, practitioners and researchers encourage companies to formalise their succession planning procedures, especially for their top leaders (Schepker et al.
Talent management is aptly described as a process that involves the identification, management and development of individuals to suit the current and future needs of companies (Cannon & McGee
As the external environment increasingly becomes ‘chaotic’, Lenkov (
Companies in South Africa grapple with complex issues such as how to address gender and race inequalities in the workforce and how to respond to skills gap (Seekings
This board succession study was conducted in South Africa as the country has a well-developed corporate governance framework (King IV). In addition, local shareholders are showing growing interest in board composition matters, specifically in the context of independence, gender and race diversity (Chartered Governance Institute of Southern Africa
The King IV Report specifically recommends that JSE-listed companies should set board race and gender diversity targets and annually report on their progress in this regard. Public companies are also expected to ensure that most of their board members are classified as independent non-executive directors (NEDs) (IoDSA
In contrast to executive directors, NEDs are not full-time employees of companies. The King IV Report prescribes that an NED who is classified as independent should not have an interest, position or association, which can unduly influence their decision-making. Furthermore, the competencies of directors should be continuously fostered to ensure that they remain effective leaders (IoDSA
As business leaders are likely to experience increasing difficulties in managing rapidly changing stakeholder expectations in the future (Odgers Berndtson
In the remainder of the article, a theoretical overview will be provided to link the agency and resource dependence theories to board succession planning. The qualitative research methodology will then be explained. Thereafter, the findings will be linked to suggestions on how board succession planning can be enhanced in future.
In this section, the agency and resource dependence theories will be covered, followed by an overview of succession planning approaches and selected board composition considerations.
In line with the agency and resource dependence theories, a board has several key responsibilities, including monitoring and advising management and ensuring optimal resource provision (Hillman & Dalziel
The separation of corporate ownership from control gave rise to the agency theory. The costly agency problem occurs when managers focus on self-interest instead of shareholders’ best interests (Jensen & Meckling
To enhance the overseeing role of a largely independent board, the leading positions of the chief executive officer (CEO) and board chairperson should ideally be separated. A lead independent director has a key monitoring role should the board chairperson also be the CEO. A lead independent director can then act as an intermediary between the board chair and other board members (IoDSA
Some authors have questioned the extent and effectiveness of managerial monitoring by independent directors. These authors’ critique centres on the application of factual versus perceptual independence classification criteria (Khanna et al.
When assessing the independence of a director, Hom et al. (
Effective board succession planning is of particular importance for boards of directors given the influences of the latest stage of the industrial revolution on human capital development. From a resource dependence perspective, companies could use different internal and external succession planning methods to develop and retain board members, as will be explained next.
Board succession planning ensures the systematic replacement of executive, non-executive and independent board members. The nomination committee is primarily responsible for this key human resource management task (Deloitte
The ability of a board to perform advisory and monitoring roles is influenced by the heterogeneity of its members, as explained by the agency and resource dependence theories (Harjoto, Laksmana & Yang
Nomination committees should, therefore, account for independence, tenure and diversity considerations when they nominate or renominate directors or source board candidates. This committee should also identify skills gap and training needs (Deloitte
Furthermore, nomination committees should ensure that their companies’ human capital is optimally leveraged not only to enhance productivity but also to ensure that the companies’ leaders can effectively respond to changes and challenges in the dynamic corporate environment (Wang et al.
The unique context of a company should be considered when reflecting on the most suitable board succession approach (Minichilli et al.
Nomination committees can use internal methods to fill board positions or they can source candidates externally (Tao & Zhao
Relay succession entails the timeous identification of a so-called ‘heir’ apparent for a leading position, such as the CEO. The identified successor is then ‘groomed’ for the foreseen future leadership position (Tao & Zhao
In the case of horse-race succession planning, several corporate insiders compete for a specific board position. This method can be applied when there is a large internal talent pool. Several candidates can then be coached by directors. The candidates’ progress can be closely observed by the nomination committee and their predecessor who is nearing retirement (Minichilli et al.
Furthermore, several authors and practitioners suggest that nomination committees should compile a skills matrix to visualise the extent of their future human capital needs at board level (Australian Institute of Company Directors
Talent practitioners anticipate a greater reliance on internal sourcing methods in the future (Chartered Institute of Personnel and Development
Deliberations on the void between the skills of directors and those required by companies will have an impact on whether candidates are internally sourced and developed or externally recruited (Makarius & Srinivasan
The ability of executives and top managers to retain their positions largely depends on how effectively they deal with environmental contingencies (Pfeffer & Salancik
Nomination committees should thus ensure that their companies’ top leadership structures are constantly (re)aligned to address the challenges and explore the opportunities related to the ever-changing corporate environment (Shen & Cho
Local nomination committees should give due consideration to director independence, the number of years that each director serves in a specific position (tenure) and diversity when contemplating board appointments, as these are prominent aspects mentioned in the King III and IV Reports (IoDSA
If concerns arise amongst shareholders that long-tenured independent NEDs have become entrenched, thereby losing their monitoring ability, corporate owners are likely to call for board refreshment (Livnat et al.
The King IV Report advises that JSE-listed companies should set board race and gender targets and annually report on their progress in this regard (IoDSA
The results of the 2020 leadership confidence survey conducted by Odgers Berndtson (
Drawing on an interpretivist perspective, semi-structured interviews were conducted with selected executive and non-executive board members of eight locally listed companies. A combined descriptive-exploratory approach was adopted to reflect on board succession policies and practices in South Africa.
The semi-structured interview guide was compiled from relevant literature and the King IV Report on corporate governance (IoDSA
Do you source board candidates internally or externally? (Do you use consultants? If consultants are used, do they play a leading role in the process?)
How does your company contribute to developing the local talent pool? (Do you make use of bursaries, internships or other programmes to support potential board candidates?)
Have you noticed enhanced shareholder activism on director independence and tenure? (Is your succession planning policy disclosed to shareholders?)
What are the main benefits that you associate with board succession planning? (Do you have any other suggestions to enhance board succession planning in future?)
As board succession planning applies to all listed companies and the King IV guidelines do not differentiate between industries (IoDSA
Snowball sampling was used to identify board members of JSE-listed companies who were willing to be interviewed on board succession planning matters. Initial contact was made via the researchers’ networks. Thereafter, some interviewees made referrals to other potential participants. Interviews were conducted with eight directors, three of whom were classified as executive. The other five participants were independent NEDs of whom one acted as a board chair. The interviewees had served on multiple boards of JSE-listed companies. Their average tenure was four years, and their focus areas included asset management, accounting and human resources.
Given the outbreak of the coronavirus disease 2019 (COVID-19), all interviews were conducted virtually via Microsoft (MS) Teams and Zoom. When conducting qualitative research, Vasileiou et al. (
The six-step thematic analysis approach outlined by Braun and Clarke (
Pertaining to transferability, the interviewees had considerable governance experience and could therefore offer informed opinions on the topic. Although the findings are not generalisable to all JSE-listed companies, the recommendations might be of value to directors working in various industries. To enhance confirmability, the recorded interviews were systematically transcribed and checked to ensure that the reported results are consistent with the recordings. The researchers attempted to objectively report the participants’ views. Selected responses were clarified with the interviewees. Direct quotes were inserted to contextualise the findings.
Ethical clearance to conduct this study was obtained from the Research Ethics Committee: Social, Behavioural and Education Research (SBER) of the Stellenbosch University (reference number: 15088) before the interviews were conducted. In line with the informed consent form, participants had the opportunity to withdraw from the study during any stage, in which case the recorded interview would have been discarded in their presence. No participant withdrew from the study. To ensure their anonymity, none of the participants have been identified in the findings section.
The second research objective is addressed by reporting on four main themes, namely (1) the nature of board succession planning, (2) director development initiatives, (3) enhancing board diversity and independence through succession planning and (4) suggestions to improve future board succession planning endeavours.
Participants explained that the selected board succession planning approach at their companies is linked to the reason(s) for searching for a potential successor. Reference was made to long-term retirement planning and emergency planning to replace a deceased director. The leadership consultant company Spencer Stuart (
Interviewees indicated that board members generally gave a sufficient period of notice before retiring. However, emergency succession planning applied when sudden retirement occurred or when directors in key positions were ‘poached’ by competitors. Amankwah-Amoah (
Participants explained that some individuals could shift positions to fulfil key roles on short notice in a case of emergency. The following example was provided by an interviewee in line with a King IV recommendation: When the role of the board chair, a key leadership position, unexpectedly became vacant, the lead independent director was likely to take up that role, either in a permanent or a temporary capacity. Krause, Withers and Semadeni (
Although all participants had some form of a succession plan in place at their boards, the formality of the succession plan differed. Six interviewees mentioned that their boards had a formal policy. A counterpart described their board succession as an ‘informal yet informed process’. The literature suggests that board succession processes should preferably be formalised (Concannon & Nordberg
The interviewees highlighted considerable differences between the succession plans for executive directors and those for NEDs owing to their divergent roles. They described the retirement of NEDs as ‘easy to plan for’ and ‘smoothly managed’. In addition, they indicated that succession planning was typically better documented for executives than for NEDs. One participant remarked that the ‘replacing of non-executives is a much slower process than if you are looking to fill an executive position’. This tendency relates to the urgency of replacing an executive who fulfils a crucial operational role. Schepker et al. (
Internal succession planning strategies of the considered boards.
Interviewee | Relay | Horse-race | Skills matrix |
---|---|---|---|
1 | x | - | - |
2 | - | x | - |
3 | x | - | x |
4 | - | - | x |
5 | - | - | x |
6 | x | x | x |
7 | - | - | x |
8 | - | - | x |
When conducting a skills assessment, one of the interviewees explained that individuals can nominate themselves for specific board and committee roles should they feel equipped to do so. This participant explained that ‘there are lots of really cognisant people who just quietly go along’. By allowing self-nomination, the nomination committee can become aware of their ambitions to fill specific positions. Pertaining to relay succession, some interviewees explained that individuals were appointed to specialised board committees to gain experience to be considered for more senior roles in the future.
In line with Makarius and Srinivasan (
The interview guide did not specifically focus on CEO succession. Yet several of the interviewees explicitly mentioned CEO succession planning, given the key roles that such leaders play in companies. As indicated in
In line with a King IV recommendation (IoDSA
Scholars caution against excessive reliance on nomination committees’ existing networks to source board candidates. Fracassi and Tate (
A counterpart mentioned that networking could be ‘very useful to identify diverse board candidates’. Likewise, Dennissen, Benschop and Van den Brink (
All interviewees mentioned instances where their nomination committees used consultants to assist with board succession matters. Four participants specified that consultants were used when appointing executives and recruiting individuals with a very specific skills set. However, two of the participants observed that they did not have notably successful outcomes in this regard.
The participants explained that consultants were briefed on specific requirements of external board candidates. The consultants should then conduct background checks and provide a shortlist to the nomination committee. All the interviewees stated that if consultants were used, the final decision to nominate specific candidates should be left to the board, assisted by the nomination committee. Whysall et al. (
After shareholders are briefed on board candidates’ profiles, they cast their votes. Shareholders then make the ultimate decision to appoint directors (IoDSA
Two integral considerations of board succession planning are the development of directors and initiatives to enlarge the talent pool from which board candidates can be selected (Spencer Stuart
Furthermore, the participants explained that their board development programmes were generally linked to operational considerations that were particularly relevant to executive positions. As a result, all interviewees deemed executive training imperative to succession planning. In line with the findings of Mans-Kemp et al. (
Participants stated that NEDs are typically experienced individuals who possess the required skills to fulfil their roles. The implication is that individuals are appointed as NEDs on account of their skills. The participants explained that development initiatives offered to NEDs are generally aimed at keeping them up to date with legislation and developments linked to their professions. A participant commented that ‘you should want to develop your skills and stay on top of your game’. In line with Mans-Kemp et al. (
All participants deemed orientation essential for all newly appointed board members, irrespective of their prior experiences. They indicated that orientation typically offers an overview of company-specific knowledge. The King IV Report reiterates the importance of offering an in-depth introduction programme to board appointees (IoDSA
The interviewees made several suggestions to grow the local talent pool from which board candidates can be sourced. They suggested offering bursaries, internships and graduate programmes to promising, diverse individuals. The interviewees mentioned that their companies annually reported on these talent development initiatives. PricewaterhouseCoopers (PwC
Several participants indicated that diversity, director independence and tenure should be considered when deliberating board refreshment.
A participant remarked that ‘you need diversity to be able to efficiently operate in a diverse environment’. Counterparts also agreed that their nomination committees accounted for diversity considerations, specifically race and gender when formulating their board succession policies. Although one interviewee confirmed that ‘formal targets are set and signed off’ at their company, all interviewees’ boards have not yet formalised board gender and race diversity targets.
To make shareholders more aware of their initiatives to enhance board diversity, the companies on whose boards the participants served annually reported on how they attempted to diversify their boards. In line with Viviers, Mans-Kemp and Fawcett (
The interviewees confirmed that independence, tenure and board refreshment considerations formed part of their directorate evaluations and board succession deliberations. All of them indicated that formal board evaluations occurred either once a year or every second year as proposed by King IV (IoDSA
The largely subjective nature of independence assessments was highlighted by several participants. In line with Van den Berghre and Baelden (
All participants deemed the King IV (IoDSA
A counterpart mentioned that such a balance could affect ‘your scoring in terms of King IV’. Clements et al. (
Most interviewees remarked that longer-tenured board members tend to add substantial value to their boards. They explained that a longer tenure typically implies that a director has accumulated considerable experience and company-specific knowledge. Despite the substantial benefits of having board members who are very familiar with their companies, Daily, Dalton and Cannella (
In view of the concern that a longer tenure might affect the independence status of a director, the interviewees suggested that tenure and independence should be reviewed in combination. Participants explained that such evaluations could typically take the form of personal assessments or questionnaires evaluated by an impartial third party. Deloitte (
Half of the interviewees observed that shareholders increasingly showed interest in tenure and director independence. They thus proposed that companies should demonstrate to shareholders that these concerns would be considered when conducting succession planning. Although succession policies are typically not disclosed to shareholders in detail, participants stated that shareholders should have the right to ask questions about such plans, for example, at shareholder meetings.
Although most interviewees regarded their board succession planning policies as sufficient, scope for improvement was mentioned. A participant remarked that ‘a lot of companies will have succession plans; it is a question of how realistic they are’. Most interviewees observed the ever-changing nature of board succession planning. One of them emphasised that a ‘one size fits all’ succession approach should be avoided. Given the advent of Industry 4.0, Whysall et al. (
A participant stressed that succession planning should not merely be a ‘paper exercise’. This participant explained that although there was a set policy on paper ‘it is quite difficult in reality [
The interviewees argued that the maintenance of institutional knowledge would become more challenging if several directors retired at the same time. Accordingly, all participants mentioned the use of a staggered approach to director retirement (also referred to as a ‘rolling succession’), as proposed by King IV (IoDSA
Another participant emphasised the importance of continuous board succession planning, adding that a strategic approach is needed by ‘looking 5 or 10 years ahead’. Practitioners agree that board succession policies should be continuously assessed to respond to unexpected situations (Spencer Stuart
Listed companies in South Africa have a well-developed corporate governance framework (King IV) at their disposal to guide them in developing and implementing board succession policies. In addition to offering guidance on a balanced board structure comprising independent directors, NEDs and executives, the King IV Report recommends that board gender and race diversity targets should be set and disclosed to shareholders. These targets are often linked to director development initiatives. The nomination committee is a key role player in the board succession process.
The researchers reflected on various board succession planning strategies that nomination committees can use to enhance their leadership structures to address the first objective. Semi-structured interviews were then conducted with selected directors serving on the boards of JSE-listed companies to gauge their views on board succession endeavours to meet the second research objective. The third research objective is addressed by offering recommendations to nomination committees, board members and shareholders, based on the thematic findings, to improve board succession policies and practices in future.
The interviewees indicated that their boards regarded succession planning as essential to ensure business continuity. Their nomination committees commonly used a skills matrix to account for current and future human capital requirements of their directorates and board committees. Marked differences were observed in the succession planning approaches adopted for executives and NEDs. Nomination committees are advised to ensure that they retain their leading role in the director nomination process should they use consultants.
Participants largely ascribed the observed lack of strictly enforced rules for director independence and tenure to the subjective and intertwined nature of these board succession matters. Most interviewees valued the experience of longer-tenured directors. They also observed growing shareholder interest in board succession planning, specifically regarding gender diversity, director independence and tenure.
Nomination committees are accordingly advised to formalise policies on board tenure, diversity and independence. They are furthermore encouraged to engage more regularly with key shareholders to discuss board composition concerns. In turn, companies should ensure transparent reporting on board succession considerations, including independence classifications and diversity policies. Deviations from the King IV nine-year term limit should be explained. Potential and actual shareholders will then be able to make more informed decisions. In turn, shareholders are urged to give due consideration to the profiles of board candidates before casting their votes.
The participants suggested that board development initiatives should be linked to board succession planning. Although they mentioned that these initiatives were largely aimed at executives, nomination committees are advised to offer continuous development opportunities to all directors. Directors are also encouraged to enhance their skills proactively and continuously to properly fulfil their divergent and evolving roles, as described by the agency and resource dependence theories.
In this study, the usage of snowball sampling largely resulted in referrals to peers in the same industry. Future scholars could conduct a quantitative study by developing and distributing a survey to directors serving in all JES-industries. Future authors could also conduct interviews with directors serving on the boards of listed companies not only in South Africa but also in other emerging countries such as Brazil, Russia, India and China. They could then compare these directors’ views on board succession planning policies, practices and development initiatives, whilst accounting for country-specific challenges and opportunities.
As companies are likely to experience escalating uncertainty in future, it is essential that nomination committees should timeously identify and develop talented leaders. The recommendations offered for proactive succession planning and prudent board renewal could enhance directors’ abilities to meet challenges and utilise opportunities related to Industry 4.0.
The authors declare that they have no financial or personal relationships that may have inappropriately influenced them in writing this article.
N.M.-K. conceptualised and wrote the article. J.N.F. collected and analysed the data and contributed to the literature review.
This work is based on the research supported in part by the National Research Foundation of South Africa (Grant number: 121880).
The data cannot be made available to protect the anonymity of the participants.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of any affiliated agency of the authors, and the publisher.