2014 How Well Do Corporate Directors Know Senior Management

2014 How Well Do Corporate Directors Know Senior Management

David F. Larcker, Scott Saslow, Brian Tayan
The Conference Board, Institute of Executive Development, and Stanford University. March

A study by Stanford, the Institute of Executive Development, and The Conference Board reveals a critical stumbling block in the succession process.

Internal candidates are the most likely to succeed a CEO, but new research reveals a critical stumbling block in the succession process: how well boards of directors know senior executives one level below the CEO and a lack of board involvement in talent development.

In this report we detail the results of our survey of more than 150 corporate directors of public companies in North America. The study results appear in the latest edition of Director Notes published by The Conference Board. Additional analysis of survey data and statistics regarding CEO turnover events at S&P 500 companies will be included in the 2014 edition of The Conference Board’s CEO Succession Practices, slated for release in early April.

“While we found that many directors interact with senior executives periodically in a boardroom setting, they do not have extensive exposure to them outside of the boardroom nor do they have detailed knowledge about their skills, capabilities, or performance,” observes study coauthor and Stanford Graduate School of Business faculty member David Larcker. “This can be a serious liability when the time comes to identify a successor to the CEO, and can unnecessarily extend the CEO search process.”

According to coauthor and founder and CEO of IED Scott Saslow, the survey results also suggest that board members have only passive involvement in the development of senior leaders. “Boards would be well served to formalize the process of explicitly identifying the required capabilities for the CEO and the executive team, and then methodically evaluate the candidates against this set of criteria,” he says. “Often this is not the case, and boards rely on informal evaluations and instinct to make decisions about who is preferred as successor, and why.”

Previous research also indicates that boards do not have extensive knowledge about talent and succession-related issues at their companies. For example, a 2010 survey found that only 54% of companies reported grooming a specific successor for the CEO position, and 39% claimed to have no viable internal candidates to succeed the CEO on a permanent basis if required to do so immediately.

Building on these earlier findings, the current study uncovered the following issues:

  • Directors do not claim to have particularly strong insight into the professional capabilities and shortcomings of senior executives. Just over half (55.1%) of directors report understanding the strengths and weaknesses of senior executives “extremely well” or “very well.” By contrast, a third (33.5%) understand these strengths and weaknesses only “moderately well,” and the remainder (11.4%) understand them “slightly well” or “not at all well.”
  • Outside directors do not play a formal role in the performance evaluation of senior management. Less than a quarter (22.6%) claim to do so, while a significant majority (77.4%) do not. Only a small percentage of companies (7%) assign a board member to serve as a “mentor” for senior executives.
  • Directors have exposure to senior executives primarily through a formal board setting. The vast majority of directors (88.7%) report attending three or more presentations per year by senior management in full board meetings. A significant majority (81.6%) attend three or more presentations per year by senior management in committee meetings.
  • Non-employee directors claim to have direct access to senior management, but they do not report taking advantage of this access very frequently. Just over a quarter (28%) meet with senior executives outside the presence of the CEO on a quarterly basis. Almost two-thirds (65%) do so “when circumstances warrant,” and 6.3% never take advantage of this opportunity.

The study authors provide recommendations for improvement that include:

  • Requiring a formal talent development program with real board involvement. The development of promising employees should not end with their promotion to a senior management level. As leader of the organization, the CEO has the responsibility to create and implement a development program for direct reports, and the board should ensure that this work is carried out.
  • Connecting talent development with succession. The talent development program should be formally connected to the CEO succession process, and the progress of individual executives should be reviewed in the context of their potential to assume the CEO position. In order to do this, the board needs to continually discuss and update the required skills and experiences inventory that characterize what they consider to be required for a new CEO.
  • Playing an active role. While the CEO is ultimately responsible for the development of his or her direct reports, directors should move beyond interacting with executives “when circumstances warrant.” They can volunteer to serve as informal mentors or advisors and, with the approval of the CEO, meet periodically with executives in the context of their everyday work environment.
  • Measuring and rewarding progress. Companies’ succession plans and talent development programs should be benchmarked against those of industry peers. Further, the CEO should be held accountable for the development of his or her direct reports, with talent development included as a key performance indicator (KPI) for his or her executive compensation program.