Retaining corporate memory when a board director decides to step down requires ongoing skills management, regular board evaluation and effective succession planning, writes Domini Stuart.
A good board keeps track of the skills it requires and will recruit to fill any gaps. But most directors bring more than their skills to the table. “When a director departs, business-critical knowledge and key relationships can be lost,” says Craig Scroggie FAICD, chief executive officer (CEO) of technology company NEXTDC and an experienced director. “Directors are responsible for the continuing success of a business, so it’s part of their job to mitigate this risk by sharing key learnings and helping to foster beneficial relationships throughout the business.”
“Open discussions that are respectful and well managed must be encouraged,” says Anthea Hancocks FAICD, CEO of the Scanlon Foundation and chair of YMCA Victoria. “Frequent contact through a range of forums and social activities will also help directors to feel more confident and at ease with each other. In many cases, directors’ contributions are most important in the context of boardroom discussions so the minutes are important for capturing their knowledge and perspectives.”
Every time a director is replaced the board must re-form into a new, coherent and effective whole. “My concern is that the formality of the board and the way it operates can create a time lag between joining and forming the important relationships,” says Dr Abby Bloom FAICD, a director of Sydney Water, the State Insurance Regulatory Authority and The Sydney Children’s Hospital Network. “I have always invited new directors for coffee or lunch to help them to feel welcome and part of the team.”
Pastor Ray Minniecon, director of Bunji Consultancies, once formed a board with the primary aim of sharing and preserving knowledge. “A friend and I started an organisation that was driven by our passion for the cause,” he says. “We reached a point where if he had been hit by the proverbial bus, it would have been impossible to keep going. We decided to create a board and were fortunate to find an external consultant who helped us to shape the board we needed – a group of experienced directors who could help us to share and capture the passion and the vision of the organisation as well as the knowledge.”
Effective succession planning
The most effective boards take succession planning very seriously. “Beyond identifying new candidates, preparing for the departure of a director involves shifting the strategic relationships established by directors so that they become a common asset in the business operations,” says Scroggie. “This also allows businesses to prepare for any expansion and reorganisation.”
Ingo Susing FAICD, managing director of advisory firm Leadership & Succession Capability, encourages boards to make a conscious effort to understand both the nature and the importance of each director’s contribution. They can then establish a proper process to mitigate the risks associated with potential loss.
“An effective succession plan is a vital first step but boards should also consider what would happen if a director disappeared without notice,” he says.
Most good chairs will perform an exit interview as part of the departure process and some directors will be subject to a much more detailed handover with a long briefing and a ceremonial transfer of files.
“This formal process is most relevant for committee chairs and topics like remuneration, contracts and management succession,” says Diane Smith-Gander FAICD, chairman of Broadspectrum, director of Wesfarmers and president of Chief Executive Women.
Hancocks suggests that maintaining a relationship with former directors, or engaging them in sub-committees or special interest working groups, can be valuable. “But we do need to remember that recommended limits on tenure are there to ensure an input of fresh ideas and avoid group thinking or perpetuating outdated approaches,” she says.
It could also be beneficial to establish an alumni network of directors and valued former employees to maintain those relationships.
“Directors should aim to make themselves available for as long as they feel they can play a positive role in businesses’ progression and succession, though in practice competing interests may interfere with this process,” says Scroggie. “This is where an alumni program could be particularly useful.”
There has been talk of introducing a clause to directors’ contracts that would oblige them to provide information for up six months after their departure. But, given the complexity of the current contracts, Smith-Gander would not support any additional obligations.
“If there is a need to access information from a reluctant director, I am confident that an appropriate legal pathway could be found,” she says. “In normal circumstances, I would expect a director to be motivated by integrity rather than obligation.”
Christine Hawkins FAICD, chairman of Cinnabar International and a director of Kimbriki Environmental Enterprises and the Fred Hollows Foundation, questions why any director would be holding information that is unavailable to the rest of the board. “If a director is holding information that is not available to the rest of the board, I would suspect there are problems within the organisation that have not been identified or dealt with,” she says.
Steven Cole FAICD, managing director at Cole Corporate and an experienced director of ASX-listed, not-for-profit (NFP) and public sector organisations, believes that a well-managed exit should lead to a clean break.
“In my opinion you should aim to extract optimal value from directors while they are still sitting on the board,” he says. “This requires healthy board dynamics, strong cultural buy-in and people who are 100 per cent committed to the role. A good chair will also ensure that each director has the opportunity, and the confidence, to speak out.
“Whenever I’ve left an organisation I’ve let it be known that I’m available if someone wants to ask a question. But I believe that holding on to relationships with people who have been around for a very long time can impede the constructive flow of ideas, innovation and stylistic change that would naturally occur when new people are appointed.”
Pastor Minniecon was happy to help one of his previous boards with a specific project but he was also quick to move on once he had made his contribution. “I’d never leave anyone high and dry but I also didn’t want to risk exerting too strong an influence on the new board members,” he says. “I believe in cutting the umbilical cord when you leave.”
Directors should also be conscious of possible liability. “There is a risk that, if a director becomes too active in the affairs of a company after leaving the board, ‘de facto’ or ‘shadow’ directorship issues could arise,” says Cole. “Whether or not the company’s directors and officers insurance cover would extend to such a person might also be in question. Without overstating the issue, this is another matter that should be kept in mind.”
Networks and relationships
Some directors are recruited as much for their personal networks as their skills. “If a director’s connections are important, the chair should ensure that other people on the board or elsewhere in the organisation have engaged with those contacts in a meaningful way,” says Hancocks.
But, as Hawkins points out, personal relationships are not easy to transfer. For example, when Smith-Gander succeeded Tony Shepherd as chair of Broadspectrum she knew she didn’t have the depth of connections in the industry and government that he had built over an entire career. Rather than regarding those as lost she renewed the board to bring in directors with relevant domain expertise and connections.
“Management needs to have the customer and supplier contacts but each director will bring connections in other ways,” she says. “And, over time, good directors will link their organisation to their contacts and develop management by bringing their knowledge to bear.”
Internal networks can also be valuable. “In my view, internal relationships with management play an important role in the smooth running of the board,” says Bloom. “The most significant, of course, is the relationship between the chair and the CEO but others are also important. For example, during one year as chair of a committee that was guiding the board on crucial issues I had to work with five different senior executives. It took a lot of effort on my part to keep on rebuilding relationships that were critical to the quality of the board’s decision-making.”
Taking practical steps
Hawkins believes that embedding knowledge lies at the heart of board and organisational culture. “It requires, firstly, an experienced chair with empathy for the directors overlaid with a desire to drive this agenda,” she says. “It is crucial that these expectations are articulated and reinforced by appropriate board or governance charters that are living documents, not just filed away on an invisible hard drive. It requires comprehensive due diligence prior to the appointment of each new director and clearly articulated expectations. Depending on board composition, it may also require hard focus and constant vigilance by each and every director, not just the chair. There is a limit to what even the best chair can achieve without the support of the whole board.”
Smith-Gander regards the board performance review and the skills matrix as the chair’s best tools in ensuring that the knowledge and skills of individual directors become the knowledge and skills of the institution.
“For example, boards that conduct a review at the end of each meeting can reflect on the quality of individual contributions to encourage directors to transfer their knowledge for the benefit of the company,” she says. “This is something that should be done along the way, not in a rush at the point of departure.”
Susing sees value in extending the skills matrix to form what he describes as a capability matrix. “This can be as simple as identifying the key relationships, knowledge and experience of each director and jotting them down on one page,” he says. “This goes a long way to ensuring the board is always prepared and not falling into the trap of considering succession as an event rather than an ongoing governance discipline.”
Most organisations have formal mechanisms for compiling cumulative knowledge and making it accessible. “Sydney Water, for example, has a system covering its operations that is particularly useful in the continuous improvement of contracting and contract management,” says Bloom. “Not all information is relevant to directors – many systems are built for management so they may be too detailed and too operational to be of ongoing value to the board. The board’s role is to make sure that appropriate systems exist and that they are used, kept up to date and easy to access.”
Overall, boards must find a balance between maintaining continuity and encouraging change. “Corporate culture develops over a long period of time and it shapes the way people do what they do,” says Susing. “As a director you must deal with complex environments and human behaviours, and an understanding of the culture can be immensely helpful. But one of the biggest challenges confronting today’s boards is disruption, so retaining knowledge and relationships should never be at the expense of readiness for change.”
Tips for retaining corporate knowledge
Accept that directors come and go and be proactive in mitigating the risks associated with losing information and relationships.
Stagger rotations and recruitments to avoid any significant loss of corporate knowledge or single person risks.
Conduct a review at the end of each meeting to reflect on the quality of individual contributions and encourage directors to transfer their knowledge for the benefit of the company.
Ensure the minutes are of a good enough quality to capture information shared in interactions between directors.
Knowledge transfer is a commercial imperative. Directors must ensure that knowledge is being captured and applied.
Spread key information throughout a business so that the loss of one or more directors will not have a significant impact on the organisations’ performance.
Be prepared to share your wisdom and experience with a former board but then move on quickly. Don’t risk exerting too much influence on new directors.
Concentrate on extracting optimal value from each board member while they’re serving on the board so that each one can make a clean break.
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