Over recent years Boards and Search firms have seen a sharp increase in scrutiny relating to Board appointments, driven both by independence and diversity requirements. That same degree of scrutiny is now being applied to Chair appointments.
In Fidelio’s Board Search and Evaluation practice, for example, we‘re already seeing the implications of changing UK corporate governance norms for Chair succession. Under UK Corporate Governance Code guidance which limits tenure to 9 years, up to 137 FTSE350 Chairs are due to step down over the next 24 months. In practice the process of compliance is likely to be slower but it is certainly an opportunity for Boards to adopt a robust and transparent process in appointing the Chair – a role pivotal for governance and key to ensuring the company is prepared for disruption.
2019: The 9 Year Limit Becomes Official
The UK Corporate Governance Code guidance on Chair tenure came into effect on 1st January 2019, stating that:
“The Chair should not remain in post beyond nine years from the date of their first appointment to the board. To facilitate effective succession planning and the development of a diverse board, this period can be extended for a limited time, particularly in those cases where the Chair was an existing non-executive director on appointment. A clear explanation should be provided.”
Some 39% of FTSE 350 Chairs have currently served over 8 years, and 31% have served over 9, which indicates that up to 137 new Chairs may be needed over the next 24 months or so. Some companies will choose to explain rather than comply – there are undoubtedly some special cases among those Chairs with unusually long service – but investors will become less tolerant in general of Chairs staying in role for longer.
Given the complex challenges facing Chairs identified by Fidelio’s research, Chairs will need to combine senior business experience with an understanding of Boards, but fresh thinking is also increasingly required. Chairs are typically highly experienced business people on appointment, and often with directly relevant sector experience. They are typically perfectly capable of learning the intricacies of a new organisation in the space of a year or so, if sufficient time is dedicated to the process, and will thus function at full strength for at least eight years.
However, many Chairs may be caught by the Code, not because they have served 9 years as Chairs, but because they have previously served on the Board in another capacity. In transition there may well be instances of Chairs just getting into their stride who are caught by the 9 year rule: but if there are exceptional reasons to extend the term, investors and regulators will have sympathy. Without a doubt, succession planning for the Chair role will increasingly take account of the 9 year requirement and this will have implications for the succession planning for all Board roles.
Increasing Investor Pressure Is Likely
With the Code now unequivocal on the subject of Chair tenure, the 2020 AGM season is likely to see a significant ratcheting up of investor pressure on Boards to comply. This may take the formal route of opposing the re-appointment of the Chair – in 2018 there were already 87 cases where FTSE350 directors faced significant opposition on their re-election, generally on grounds of tenure or independence. The proxy advisory services are very influential in this space – smaller asset managers in particular tend to delegate the entire voting process – and are likely oppose re-appointment in the case of companies who do not comply with the Code. In addition, the larger asset managers have dedicated governance teams who are also increasingly taking a firmer line on code compliance.
The Senior Independent Director: Taking the Lead
Senior Independent Directors are typically charged with the Chair succession and recruitment process, and this will be subject to increasing scrutiny. The Code is clear and specific on the process to be used:
“Open advertising and/or an external search consultancy should generally be used for the appointment of the chair and non-executive directors. If an external search consultancy is engaged it should be identified in the annual report alongside a statement about any other connection it has with the company or individual directors.”
Thus, the process for appointment of a Chair mirrors lessons that regulators and investors have learned from Non-Executive Board appointments more generally, and we’d refer to Fidelio’s recent commentary on the governance of search for a checklist of actions to drive positive search and appointment outcomes.
However, there are a few additional provisions for Chairs. They must be independent on appointment, according to the definition in Provision 10 of the Code, referring to pre-existing employment, business relationships and other links. The same person should not be Chair and CEO at the same time – a trend Fidelio is seeing being adopted internationally – and the Chair should not chair the Nominations Committee when it’s appointing the Chair’s successor. In the event that the SID him or herself wishes to become Chair, it will be necessary for one of the other Non-Executive Directors to lead the process.
An Opportunity to Improve Diversity
It’s striking that only 20 of the firms in the FTSE350 are chaired by women, at just 6% woefully short of the overall Hampton-Alexander target of 33% for female representation. There seems to be a glass ceiling for the vital Chair role that no longer exists for regular Non-Executive appointments. Fidelio can testify that there is no shortage of well-qualified candidates. In fact, with UK Board turnover currently running at up to 20% as most Non-Executive Directors move towards shorter six-year terms, there has already been a significant influx of well-qualified Directors to Boards.
Fidelio will continue to support clients in building Boards fit for the future, and in particular in identifying and attracting excellent Chair candidates who are well placed to navigate the complexity and disruption facing virtually all sectors. Moreover, we will also gladly support the work of the Hampton-Alexander Review to ensure progress in increasing gender balance and diversity in Chair succession.
For more information on how Fidelio Partners can support your Board in Chair succession planning and the search for qualified candidates, please contact Mark Cumberlege at mcumberlege@fideliopartners.com.