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October 29, 2015

Directors should set out plan for future successors, says FRC discussion paper

By Franchesca Hashemi

The Financial Reporting Council (FRC) has warned company directors to invest more time choosing their successors or risk ruining their business.

In a discussion paper published on Tuesday, the FRC called on members of a company’s boardroom to recognise strategic succession planning as a prime risk averter in unexpected senior level departure situations.

"There continue to be well-publicised examples where the lack – or inadequate implementation – of planning has led to a range of negative consequences for companies, including share price movement, profitability, customer retention and market share, all of which contribute to their ability to sustain and deliver the business model", the British regulator said.

A slew of internationally recognised senior leaders resigned from their jobs this summer, including Martin Winterkorn from VW and Toshiba’s former CEO Hisao Tanaka, after accounting scandals that raised serious questions over director’s diligence, and corporate culture.

The FRC’s paper – entitled ‘UK Board Succession Planning’ – lists the absence of succession planning as an indicator of poor governance, especially when the company is facing unprecedented changes to its operations or difficult market conditions.

One of the review’s "practical" examples to ensure minimal damage arising from a director’s impromptu departure – which may come as a result of death, illness, or poor performance – is the formation of a well organised nomination committee.

"Given boards already have a very full agenda, it has been suggested that greater use should be made of the nomination committee to make recommendations to the full board as to succession planning", the paper added.

However, the FRC notes that sometimes smaller listed companies are an exception tothis, due to potential resource restraints.

The FRC’s clambake on succession planning partially stems from the Parliamentary Commission on Banking Standards’ recommendations around director nomination, in which it states ‘widespread perception that some "natural challengers" are sifted out by the nomination process, which can ‘greatly influences the behaviour’ of non-executive directors and their board careers. Yet the FRC has said it found "virtually no assent" to this when researching for the discussion paper, but rather the "challenge" is in fact integral to choosing alternative candidates for senior posts.

Moreover the FRC has said searching for candidates should be undertaken "against objective criteria" with due regard for "the benefits of diversity, including gender". Not only is a genuine board level diversity essential, but the major advantage is avoiding ‘groupthink’ while keeping a company "in touch" with its global customer base, the FRC explains.

The FRC’s discussion paper is seeking feedback on the issues raised to be submitted before 29 January 2016.

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