Attracting & Motivating a High Performance Executive Team (Mining)

by | Nov 12, 2018 | Board Dynamics, Governance, Leadership

An Interview with Corporate Director, Peter Gillin

Peter Gillin is a Corporate Director who currently serves on the Boards of several public companies, including: Turquoise Hill Resources Ltd., Sherritt International Corporation, Dundee Precious Metals Inc., TD Mutual Funds Corporate Class Ltd. and Wheaton Precious Metals Inc. He was a Director of HudBay Minerals, Inc., and was Vice Chair of N.M. Rothschild & Sons Canada Limited, an investment bank. Peter was President and CEO of Zemex Corporation and Chairman and CEO of Tahera Diamond Corporation.

Peter holds an HBA degree from the Richard Ivey School of Business at Western University and is a Chartered Financial Analyst. He is also a graduate of the Institute of Corporate Directors – Director Education Program at the University of Toronto Rotman School of Management and has earned the designation of ICD.D from the Institute of Corporate Directors.

Follow Peter Gillin on LinkedIn.

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GGA: What are the key factors in developing incentive plans?

Peter Gillin: Boards focus on the motivation and attraction of new executives, but a key element is also the retention of existing executives. Boards need to have a clear idea of what they want to pay for – in other words, what is the job and what are the important elements of that job for which the candidate will get compensated. And that, of course, involves the specific goals and objectives for the executives and the time horizons for accomplishing them. In any package of compensation, you must mix and match the incentives, obviously salary, plus short-term bonus (typically in cash) and then various other equity related instruments. In order to motivate people in the proper way you must offer a diverse portfolio. It’s also important to start early. Incentive plans require careful consideration, and so much of the planning is driven by specific goals, objectives, and an element of subjectivity. There needs to be time for the executives to provide input – of what they think they’ve accomplished or not. Bench-marking for senior executives is a very widespread practice, but it’s inherently inflationary and sometimes people lose sight of that fact. All in all, you determine what you want to pay for, how you’re going to pay for it and then you compare that to the rest of the world to see if it’s fair.

GGA: What about the considerations needed when building effective incentive plans, specifically within the mining space?

Gillin: In my experience, the greatest single difficulty in formulating any of these plans, in the mining space, is the movement of commodity prices and whether that creates a financial windfall or financial penalty. Ideally you want to have your compensation system designed to operate exclusive of the performance of the company itself because the companies have absolutely no control over that. You cannot forget to factor in the alignment with the shareholders. They suffer when the commodity prices decline, and they are happy as clams when prices increase. What you want to avoid is generously awarding executives when things are bad – that doesn’t sit well with the shareholders. Usually, senior executives have substantial equity awards, and when you compensate them there is an expectation that they have done a first-class job – met all of their objectives and goals (in terms of production).

GGA: You mentioned equity awards. As of late, equity has become obviously more complicated. How do approach equity awards?

Gillin: Well. Cash is the really the easiest approach. As you know, equity participation incentives for executives are of utmost importance and performance share units around the ascendancy options are on the decline. Interestingly, there’s a difference between Canada and the United States and the utilization of those more so in Canada than the U.S. In fact, the mining industry tends to utilize them a great deal more than other industries, particularly smaller mining companies. But, as I said, when things get complicated cash becomes king.

GGA: What about technology? Do your boards use any when developing incentive plans?

Gillin: Absolutely. There is a new trend of incorporating board management software into the executive compensation planning process. One of my companies, in particular, installed a balanced scorecard system and it’s an outstanding piece of technology. It doesn’t do all of the work – determining what compensation is fair – but it works with the board’s subjective judgement to design incentive plans. The board is responsible for using the technology to generate some numbers and then deciding if those numbers feel right, under that circumstance. Ultimately, when it comes to consideration, it’s very valuable to have the combination of the board and the technology.

GGA: How has the role of directors changed (regarding compensation)?

Gillin: Well certainly from the general board perspective, the overall evolution of governance, the improvement of governance techniques, criteria and behaviors have evolved. It’s just been a massive increase over the last 15 or 20 years, if not longer. I mean, I know the first board I ever went on, years and years ago, somebody suggested using a dartboard when determining how you compensated people. It wasn’t sophisticated. But that’s no longer the case. I mean, everything must be well designed, well-structured, very transparent and fully defensible. And that applies to compensation, but also board behavior – meaning board outreach. Specifically, shareholder outreach by the members of the board. I’ve done that in several companies and the agenda is always one of three topics: governance, compensation and strategy formulation. It’s very often focused on compensation. And ordinarily, if the shareholder calls the company and wants to have a conversation, then you know you’re already in trouble. So, if you do it proactively you get a much better response. That’s a relatively new development, but none of this is going to stop. It’s just the way of the world these days.

GGA: What would be the key takeaway from what we’ve covered today. If readers were to walk away with only one piece of information, what should it be?

Gillin: That’s hard. We’ve covered a lot of important information. Compensation is a very important element in this discussion, the main focus, and how companies work to determine it. It’s often the trigger for activism, and all of the other elements flow from it, together with stock price performance.

Risky Business & Board Oversight

by | Oct 29, 2018 | Board Dynamics, Governance, Leadership

Good board members ask good questions.

Risk exists in every organization and it is a board member’s role to probe until they are convinced that management is not incurring any undue risk or risk that is outside of the boundaries they helped to establish. Board members must be cognizant of the lengthy list of risks that exist. Be it:

  • financial risk,
  • legal risk,
  • human resource risk,
  • governance risk,
  • political risk,
  • cyber risk,
  • social media risk, or
  • headline risk.

Overall, board members need to make sure that they are successfully overseeing risk, asking good questions, and ensuring there are other elements of good governance and risk management are place.

Guiding charters, bylaws, mandates, strategic plans, policies and procedures need to be formulated, implemented and updated regularly because they provide focus and direction to proper oversight and establish a framework and safety net for your board to operate within. Operating without these documents, or failing to update them, will not only put your organization at risk but will also increase your board’s liability. Often, board members don’t realize that guiding documents can help protect board members, if something was ever to go wrong. If something did go wrong, your Board must be able to answer “yes” to the following questions – it will go a long way in protecting board members and the stakeholders they serve.

  • Did the board members act with loyalty, prudence and impartiality?
  • Did the board members act within the guidelines of the existing and relevant policy or procedure?

Given the evolution of cyber threats, protecting confidential or sensitive information is an area that is relatively new to organizations. Over the last decade, many boards have evolved away from printing out and shipping board meeting packages to every member.

  1. With the emergence of email, many boards began to send out board materials electronically.
    • This opened risks to email hacks, the ease of forwarding sensitive material, and fact that material remained accessible on lost or stolen devices.
  2. The provision of document repositories then enabled boards to store and access electronic documents on the internet.
    • Many of these services were not secure which made them vulnerable to hacks.
  3. The emergence of secure digital platforms now enables boards to improve their document security while simultaneously enhancing access to electronic materials and inter-member and stakeholder communication tools.
    • With enhanced security around access, and control, this next evolutionary step is proving to be the logical next step for boards that are concerned about mitigating risk.

Risk is a reality in all organizations and board members need to remain vigilant in its oversight. As seen in guiding frameworks and board materials distribution and communication, things will continue to evolve, and related risks will continue to change. Therefore, board members need to continue to ask good questions, and continue to ensure that their organizations are managing risk in a proactive way and doing what is necessary and required to safeguard themselves, as fiduciary leaders and the organizations they are entrusted to oversee.

An Essential Tool for Improving Board Composition

by | Oct 22, 2018 | Board Dynamics, Diversity, Governance, Leadership

Creating a Board Skills Matrix

An essential question asked by board members is how can we improve our performance? While there are many possible answers to solve this riddle, making sure your board composition is set-up as intended is key. An increasingly prevalent tool used by boards in evaluating their board’s composition is the Board Skills Matrix. According to a 2017 study by Equilar, 307 U.S. and Canadian public companies disclosed the use of a Skills Matrix within their proxy statement. A Board Skills Matrix strengthens an organization’s overall governance practices by identifying the current skills, knowledge, experience and capabilities of current board members. The matrix is a relatively simple table that lists all board members along the top with a board’s view of the essential skills and experience required by the board to be most effective.

Once the essential skills are determined, the board can then evaluate whether each board member possesses that skill or not with a simple check mark (see example below). This evaluation can be done, by the Board or Nominating Committee Chair, by conducting their own assessment of each board member or by asking each board member to self-assess against the identified skills and experiences through use of a questionnaire. At GGA, we have developed a digital boardroom platform, the emPower platform, which can be used by boards to identify the skills and experiences they require. Then each board member can fill out an online self-assessment questionnaire on how they stack up against the identified skills and experiences. These individual questionnaire results can be consolidated and instantly accessed by the Board or Nominating Committee Chair to identify any gaps amongst the current board.

Illustrative Example: Board Skills Matrix

A completed skills matrix, as demonstrated above, helps the board in two ways:

  1. Board Member Development – the matrix identifies areas for individual skills development, that can be strengthened through additional education and training opportunities. This allows for an individual development plan to be created to improve the board member’s overall skill level.
  2. Board Skills Development – the matrix can identify areas for overall board improvement through education or through the recruitment of a new board member that possesses a specific skill set to improve the board’s composition.

In the example above, Board Members # 3, 4 and 6 could use individual skills development in the area of Investments. Increased skill/experience in Compensation and Human Resource matters is required for the board, as many board members do not have experience in that area.

At a bare minimum, the results of the Board Skills Matrix assessment should be shared internally so that the board can identify any areas for future improvement. However, many public companies are taking a pro-active approach and disclosing the results of the assessment directly in their proxy statements on an annual basis (as evidenced by Equilar’s research above). For mid and large cap companies, shareholders are expecting more transparency from companies which require companies to be honest about the skills and experience the board truly values and how each board member stacks up. They can also use this opportunity to detail to shareholders how the board plans on filling any identified gaps in skills.

How does a board determine which skills and experiences to include within its skills matrix? It starts by asking where the organization is today and where it wants to be in the future? Are the skills required to sit on the board today going to be the skills required 5 years from now? This allows the board to determine the skills required to sit on the board and add value, both now and in the future. There are certain skills that are commonly required for a board such as Financial Literacy, Human Resources and Legal experience, but boards should also ask what industry-specific skills and experience are required in addition to functional experience. Are there diversity aspects that need to be considered by the board in addition to specific skill sets? These questions should all be answered when developing a skills matrix.

Required Board Skills

What skills should you be looking for? Recent research by Korn Ferry indicates that the Top 5 skills required by boards as part of their Board Skills Matrix are as follows:

  1. Finance/Accounting (97% prevalence)
  2. Industry Knowledge (95% prevalence)
  3. Compensation/HR (86% prevalence)
  4. Board/Governance Experience (81% prevalence)
  5. Legal/Regulatory/Compliance/Government/Public Policy (80% prevalence)

Other skills/experience included by companies are:

  • M&A/Corporate Finance/Investment Banking/Capital Markets (74% prevalence)
  • Risk Management (64% prevalence)
  • Executive Leadership (63% prevalence)
  • Strategic Planning (48% prevalence)
  • International Experience (45% prevalence)

While not identified above, a growing number of companies are also including Cyber-Security and Information Technology experience on their boards to deal with the increasingly concerning issue of cyber-hacking.

Diversity & Matrix Development

Historically, companies produce a long “laundry list” of skills and experiences as part of their Board Skills Matrix. However, institutional investors are starting to advocate for a more nuanced approach to developing a skills matrix. Instead of including 10-15 different skills and/or experience, they prefer to see companies disclose the 3-5 most important skills required on the board with an evaluation of how each board member compares against these skills. This makes it more clear which skills and experiences the board feels add the most value and how the current set of board members adequately cover each of those skills/experiences.

In addition to skills and experiences, companies are also looking at ways to increase the diversity on their board and will sometimes include this as one of the board considerations when evaluating board composition. While quota-based systems have been implemented in many European countries, they have historically not made their way across the Atlantic to North America. However, recent trends indicate a growing focus on gender diversity in North America, with California recently approving a quota-based system for public companies incorporated or headquartered in the state. In Canada, the Toronto Stock Exchange (“TSX”) has implemented a comply or explain regime that requires companies to disclose the existence of a gender diversity policy for executives and board members or explain why a policy has not been put in place. ISS and Glass Lewis have also put in place specific voting recommendation guidelines that will recommend “Against” votes for Nominating Committee Chairs in situations where there is no written diversity policy and no female board members. These new laws and policies should cause boards to consider diversity within their matrix in order to stay in line with this evolving trend. Diversity should also go beyond just gender to include age, race, religion and ethnicity as well.

Closing Thoughts

Getting the composition of your board right is a tough job, especially with the evolving nature of the world as we transition to a more digital world and deal with emerging issues such as climate change, cyber-security and sustainability. It is important for boards to put in the proper processes in place to ensure they are operating efficiently and effectively. One of the essential tools in doing this is the development of a well thought out Board Skills Matrix to identify the skills and experiences required and evaluating your board members against this criteria. By using this tool, boards can prepare themselves to deal with a company’s major issues, both today and into the future, thereby acting in the best interests of stakeholders.

Like what you read? Feel free to browse through the rest of our blog content (how about checking out The Power of Board Assessments) for more.

How to Chair a Board Meeting

by | Sep 17, 2018 | Board Dynamics, Leadership, Meeting Effectiveness

Our Advice for Chairing an Efficient Board Meeting

 Welcome. Please everyone, take your seats.

You’re standing at the front of the room, ready to nosedive into the fifteen agenda items scheduled for the next 2.5 hours. There’s never enough time in the day, let alone allocated for that quarterly board meeting. Nevertheless, you’re ready. Thanks to an über knack for preparation, your watch and smart phone have already been synced to the antiquated clock ticking away at the back of the room. Hell-bent on keeping everyone focused and on schedule, nothing can stop you now.

Board Chair Qualities and Attributes

Being successful at the helm of a board meeting isn’t a fate destined for just anyone. A board chair needs to possess a thorough understanding of exemplary corporate governance principles. A fruitful board chair will have and maintain a strong relationship with the CEO, becoming their go-to for advice, counsel and support. To be successful, they must have experience in the organization’s industry. Exceptional board chairs will have the vertical knowledge and experience, on top of possessing the needed social and organizational skills to run a board meeting with ease.

Contrary to some incessant advertisements, one size rarely fits all. Such a sentiment is especially illustrated when it comes to the personalities of members on any board. Board chairs need to be ready to deal with every kind of personality type; after all, board members are human. Open mindedness and humility are a couple of imperative attributes that a board chairperson must have. These attributes will allow them to hear all sides of arguments, permitting opinions to come forth respectively, and creating a collaborative environment. It will also allow the chairperson to play devil’s advocate, when necessary, to avoid any chance of group-think.

The board chair must be decisive and confident in tone and body language. They need to keep control of the meeting, without coming off as excessively demanding. An expert chairperson skillfully blends the ideas of board directors and clarifies their perspectives.

During the Meeting

Robert’s Rules of Order. We rarely think twice about Robert or his rules. We don’t think twice because, without exception, board meetings universally operate according to Robert’s Rules, which is commonly known as parliamentary procedure.  A prosperous board chair will be familiar with the basic rules of parliamentary procedure and know exactly how to look up regulations for uncommon situations.

Calling the Meeting to Order

First and foremost, the board chair will establish a quorum, which is defined in the organization’s bylaws. Simply put, a quorum is a majority vote. The board chair will count members as they arrive for a meeting and the board secretary will note whether a quorum takes place, in the meeting minutes.

If a quorum isn’t established, the board chair may do one of four things:

  • Reschedule the meeting – for a day when more members are available.
  • Adjourn the meeting.
  • Recess – put the meeting on pause, giving the members more time to return to the room.
  • Round up the members like a shepherd does his sheep – call them personally and see if you can get enough for a quorum.

Once the board chair establishes, or re-establishes a quorum, the meeting can begin – ceremoniously marked by the resonating pound of the gavel.

Opening Remarks and Minutes Approval

An excellent board chair will kick off the meeting by acknowledging the board directors and guests – which sets a respectful tone for the meeting. Opening statements are an opportune time to make any announcements, give thanks to retiring members for their service, and provide any last-minute reminders.

If applicable, the corporate secretary will read the previous board meeting’s minutes. The board chair will ask for any modifications to the minutes. If the directors have corrections, the secretary will make them. The chair will then call a vote to approve them or approve them as amended. A motion gets seconded and a vote to approve finalizes the approval of the minutes. The secretary will make note of the approval.

Reports, Orders and New Business

What’s a board meeting without those reports we know and love?

  • Treasurer’s Report – there is no official vote on this report, unless it has been audited first. The report is simply filed.
  • Officers’ Reports – the secretary may read these reports out loud or ask the directors to read them on their own. The chairperson will cover any outstanding matters that require action and calls for a motion and a second to initiate voting.
  • Executive, Standing and Special Committee Reports – These reports will be submitted, prior to the meeting and the directors are tasked with reading them, prior to the meeting. If any recommendations come out of these committees, the board chair will present the motion, and call for a vote.
  • Special Orders – these orders are specific actions, e.g. nominations and elections, that occur at certain times of the year.
  • Unfinished Business and General Orders – pertains to any outstanding agenda item that didn’t get resolved in a previous meeting, so the board chair moved it to the current meeting for further review.
  • New Business – refers to new agenda items. Board directors may introduce a new item, prior to the meeting, with approval of the board chair. The item will then be debated, amended, and put to a vote.

Announcements and Adjournment

At the end of the meeting, the board chair will open the floor for any general announcements. The board chair will then close the floor and entertain a motion to adjourn, which must be seconded and may not be amended. A majority vote will adjourn the meeting.

Closing Thoughts

So, there you have it folks. Your go-to-guide on how to successfully chair a board meeting. Feel free to browse through the rest of our blog (how about checking out The Secret to Successful CEO Succession Every Board Should Know ) for more.

 

Tips to Avoid a Proxy Fight

by | Aug 27, 2018 | Board Dynamics, Governance, Leadership, Productivity

Learning from Past Mistakes to Avoid a Proxy Fight

All publicly-traded companies face the risk of a proxy fight with one or more of its current shareholders. In a nutshell, a proxy fight is a situation where two corporate factions (typically the Board/Executive Team vs. an activist shareholder or a group of company shareholders) fight for votes from remaining shareholders in order to effect change in a particular area of governance in the company.

This issue often occurs when a new slate of board members is proposed to replace a group of existing board members by an activist shareholder or group. The new slate of board members are generally individuals who are receptive to the activist shareholder’s views on how to change the company while the existing board members are often resistant to the activist shareholder’s views. Common areas of disagreement that can lead to a proxy fight include: future company strategy, executive compensation, company performance or whether a sale of the company or continuing as a stand-alone company is in the best interest of shareholders.

There are many examples of high-profile proxy fights in North America in recent years including: Proctor & Gamble, Yahoo, Dupont, CP Rail and Crescent Point Energy. However, recent research by Vinson & Elkins LLP has shown that in 2016, 83% of all proxy contests in the United States were at companies with market caps of less than $1 billion, which means that proxy fights are a risk for all size of companies in the marketplace. Even though many of these proxy fights result in unsuccessful vote outcomes for the activist shareholders, they often lead to significant change at companies. For example, Proctor & Gamble ended up appointing activist shareholder Nelson Peltz to its board even though Peltz lost the proxy fight. At Crescent Point Energy, while Cation Capital was unsuccessful in electing new board members, former CEO Scott Saxberg was forced to step down and the company indicated a renewed focus on capital allocation, cost reduction and return on capital employed. All had been promoted by Cation as part of its proxy fight. In a successful proxy fight, Bill Ackman was able to get his slate of new board members elected to the board at CP Rail in 2012, which resulted in an overhaul of management with the hiring of Hunter Harrison as CEO and a renewed focus on driving cost efficiency at the company. The resulting change was extremely beneficial to CP shareholders as its market capitalization has grown almost 300%, while significantly reducing its Operating Ratio under the new strategy and leadership.

The lesson here is not to say whether proxy fights are good or bad for shareholders, but to raise awareness that if you are a board member at a publicly-traded company you need to be aware of the risk and how to avoid getting into this difficult situation. Here are five strategies that can aid your board in avoiding a proxy fight.

Five Strategies to Help Your Board Avoid a Proxy Fight

1. Know your shareholders:

Have a deep understanding of your Top 10, 25 and 50 shareholders. Who are the most active among them? How much of your company’s shares do they own? Do they often vote their shares at your Annual General Meeting (AGM)? Do they follow the voting guidelines or research of a proxy advisory firm (e.g. ISS, Glass Lewis)? Do the shareholders have published voting guidelines on board make-up, corporate governance or executive compensation designs that they prefer? Having the answers to these questions will allow you to understand the potential concerns that shareholders might have with your company and help you address those concerns through your public disclosure or engagement activities.

2. Proactively engage with shareholders rather than react to their views

Seek a dialogue with your Top shareholders and try to engage with as many shareholders as possible either face-to-face or through active communication through e-mail or phone calls. This dialogue will allow you to communicate your Board and management’s story and share why you believe that your strategy and approach are in the best interest of the company. It also provides a vehicle for your shareholders to share their concerns, which allows you to better understand their views and potentially implement certain changes to the Board and management’s plan to address their concerns. If possible, you should try to include your CEO and/or Board Chair in these conversations, so that both the Board and management are hearing shareholder concerns. You must ensure that a consistent message is being presented by the Board and management in any of these conversations to ensure the same story is being told to all shareholders.

3. Monitor your company’s pay-for-performance linkage

Executive compensation has become a lightning rod in recent years for proxy fights when activist shareholders can point to relatively high compensation and relatively low performance over a 3 or 5-year period. It is imperative that the board monitor the relationship between pay and performance and ensure that there is general alignment between the two. While the Compensation Committee and board should be monitoring this alignment on an annual basis during committee/board meetings, another way to demonstrate alignment to shareholders is through the annual proxy circular where a company reports on the compensation for its top five executives. Compensation is required to be disclosed following a rigid format in the Summary Compensation Table, but that does not preclude a company from demonstrating executive pay in other ways using “Realized” or “Realizable” pay calculations. Inserting “Realized” or “Realizable” pay graphics into the annual proxy circular helps to illustrate that what has been paid, or is potentially owed to executives, aligns with the company’s performance even more so than what is disclosed in the Summary Compensation Table. The Compensation Committee and Board should also be monitoring the CEO’s annual performance scorecard to ensure Short-Term Incentive (bonus) payouts align with performance and do not surprise shareholders. The scorecard should also be updated on an annual basis to deal with the evolving strategy and the nature of the company’s operations.

4. Be transparent

Ensure that your company is open with shareholders and is seen as acting in a transparent manner. Often, companies can find themselves in proxy fights and situations where shareholders are unclear on the company’s strategy or why compensation has been structured in a certain way. If shareholders are unclear on the future strategy or do not understand the compensation design, they are more likely to side with the activist shareholder who has a strong vision and strategy for the company with a clear compensation design that makes sense to them.

5. Monitor your Board renewal process

A common theme in many proxy fights is that the Board has become too entrenched in their role and has not done a good enough job at challenging management’s thinking. This issue tends to stem from the tenure of current board members. The activist shareholder may perceive that certain board members lack independence because they have sat on the Board for too long. This perception may not be the case, but it does not stop the activist shareholder from using this appearance to his or her advantage. Your Board should be actively monitoring its renewal process by evaluating the diversity of skill, background, gender and experience of board members – giving rise to the following questions:

    1. Are there areas where we can strengthen our skills or promote greater diversity in views and experiences?
    2. Are there board members who are not carrying their weight?
    3. Is the company moving in a new direction that requires a different set of skills at the Board level?

Being able to communicate this renewal process with shareholders is critical and can be communicated annually through the proxy circular or through providing this information on a company’s website. It will enlighten shareholders to the rigorous process your board follows to ensure it is operating as effectively as it can.

Closing Thoughts

Proxy fights are never fun. They disrupt the company and divert the Board’s and management’s attention away from executing on the company’s strategy and more towards fighting off an activist shareholder. In many cases though, proxy fights can be avoided through better understanding of your shareholders, hearing their concerns and proactively communicating the company’s story so that you can try to deal with any issues before they get out of hand. This strategy requires the company to act transparently; while monitoring the alignment between executive pay and company performance. Annually, the company can demonstrate this transparency through disclosure of the alignment between pay and performance, the company’s compensation design and its board renewal process in the proxy circular. Learning from past mistakes can ultimately help board members weather the storm at their company and hopefully avoid the costly and disruptive nature of a proxy fight.

The Secret to Successful CEO Succession

by | Aug 15, 2018 | Board Dynamics, Governance, Leadership, Succession Planning

“Tim Hortons is hiring — Canada’s No. 1 coffee chain is looking for a new leader after the abrupt departure of its CEO. The company announced Wednesday that Don Schroeder, 65, no longer serves as president and CEO after three years at the helm and two decades as an employee.” 1 [i]said in a 2015 press release.

The board’s number one responsibility is CEO succession planning, yet so many boards ignore the criticality of proactively discussing the senior leadership succession plan.  While industrial psychologist researchers have identified that some of the most successful CEO successors are those that have been hired from within,  most organizations do not have the depth of talent necessary to identify the new captain of the team.

The Case For Internal Succession

When a board is confident in the direction of the company’s business strategy and it is staffed with a suite of executive team leadership, selecting a current team member who  demonstrates the competencies and leadership capabilities  generates the greatest chance of continued success of the organization.  When a board is put to the task of selecting its next CEO, many boards in this case will evaluate one or two internal executives through a series of interviews and competency profiling tests to determine who would be best fit for taking the next CEO role.  For year’s now, HR leaders have discussed the infamous “horse race” set up by Jack Welch at General Electric. The basic truth is that few organizations are the  “General Electric of a bygone era. All of my experience led me to the conclusion that unsuccessful searches revolve around a chasm between the financial expectations and performance criteria of the final candidate and the board.

The “Secret Sauce”

This blog focuses on how boards must get the uncomfortable conversations out of the way, before starting the negotiations with the desired candidate.  We call this the “board’s CEO negotiation playbook”.  It is the secret saucethat increases the probability of closing the candidate and getting the talent you want and mitigates the risk of the wrong candidate getting the offer.

The absolute worst-case scenario for any board (and their recruiting strategy) is when your best and final job offer of compensation, benefits and perquisites isn’t “good enough” for the candidate receiving the offer.  This is not a discussion about an employee earning $100,000, rather a CEO’s executive compensation package that is in the realm of a multi-million-dollar contract with sign-on equity and bonus guarantees.  That’s right, the next leader to drive shareholder value!

  • Our observations of the many boardrooms when the CEO succession is underway is that the board, rightfully, structures an ad hoc CEO search committee and that committee works in isolation with an executive recruiter. What the executive recruiter seems to never get right is that because the paycheck for the recruiter is a function of the CEO’s compensation, the recruiter fails to get into the uncomfortable budgetary conversation  as the search begins. Boards often do not have a solid frame-of-reference on competitive pay structures for the CEO of their future.  They know only what they were paying the prior CEO, but they lack context of competitive pay levels and pay structures within the candidate pools of talent.

The Independent Compensation Advisor: Hired to Bridge the Gap

When conducting an external search, the board must hire a reputable retained executive recruiter to validate the CEO competency profile  and to help craft the CEO search strategy.  The search strategy will often identify a few industry sectors in which qualified candidates may be working.

That said, each industry sector may present a unique pay level that is materially different to the current executive pay being offered by the organization hiring the CEO.  When we work with our clients, we conduct a compensation review for each of the sectors of interest.  The compensation review would cover not only active CEO’s within the industry, but  other key executive roles  – to help understand the various pay levels by industry and by executive.  This review enables the board to understand how competitive their current compensation/incentive plan was for the former CEO.  In some cases, the compensation sector review may identify that, within the search strategy, some industries pay materially higher than the former CEO was compensated, or vice versa.  The compensation review also identifies compensation structure trends by industry and can help paint the picture of what is “market normal” in the broader sea of executive talent.

After the compensation review is completed, it is critical to sit down with the Board and articulate the “realistic” budget for the new CEO. The market data is very helpful in validating the reality of the compensation and incentive levels for CEO candidates. The peer compensation data provides an understanding of the market spectrum the viable candidate may consider.  Are they at the top end of the market range or the bottom?  After the broader compensation “bookended” budget is identified by the compensation review, the next layer is to understand the current governance trends around the “deal breakers”.  Here is where the independent advisor can really show their courage and brevity in advising the board.

The negotiation deal breakers are the one-time requests made by the candidate.  These include: buying out the executive’s forfeited equity he or she may lose when resigning at his/her company, guaranteed bonus period, crediting years of pension service in the company’s pension plan, paying for excessive perquisites etc.  The board’s advisor will have a strong understanding of the capital market appetite for recruiting. However, the board often ignores these critical conversations up front, which is one of the leading causes for failing to close the desired CEO candidate.  For the board members reading this blog, we challenge you to ask some of your board colleagues to discuss how much are they willing to offer in a sign-on situation. Our experience – two very different perspectives.

The Negotiation Rule Book

Once the compensation review is presented, the bookended CEO compensation budget is identified and the board is aware of the market appetite on one-time sign-on agreements; the board needs to come to a unanimous view of what the board will ultimately be willing to offer to close the right candidate.  This conversation is most helpful when done before the search is started and best when the recruiter is not present, to help avoid any unnecessary conflict of interest.  After the board comes to an agreement on the go/no-go recruitment offerings, then the negotiation rule book can be formulated and presented to the recruiter.

The recruiter will benefit from understanding the totality of the “rules of the search”.  The recruiter is your front-line representative that is doing the hard work to find the candidate.  According to Jay Rosenzweig, founder and CEO of Rosenzweig & Company, the world’s leading boutique executive recruitment firm, “a key component in structuring a successful search is establishing, in advance, realistic compensation parameters. This allows the recruiter to better target the most relevant candidates, which typically saves time and produces more satisfying results for all parties. As with so many things, strong up-front research and a common understanding of objectives can make or break an executive recruitment project.”  When the recruiter understands the entire truth of the budget, they will temper the candidates’ expectations early in the recruitment process.  When a recruiter does not fully understand the budget, or the one-time requests that might be offside, the recruiter may land in uncomfortable situations where they promise the world, but can only deliver an island.  The negotiation rule book also aids in how the recruiter uses their network throughout the search. The recruiter can pivot from potential candidates that will simply be “too expensive” for the role and can convert them into a connector for referrals.  This is gold for the company and the recruiter.

Board of Directors REMINDER! – When you find yourself in the position of needing to search for your next CEO – invite your independent advisor into the process early and use them as a partner to develop the negotiation rule book that is right for your organization.