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GRC in Malta: The role of succession planning in corporate governance
In this article we try to explain how a board should go about succession planning in practice, and delve into certain issues that should be considered when doing so.
While the focus of this article is on listed and/or regulated companies, many of the principles and practical issues are equally relevant to private unregulated and unlisted companies.
What is succession planning? Succession planning in a nutshell refers to the board’s plans for replacing the members of the board and/or the company’s senior management over both the short and longer term, including the process for doing so and contingency planning for unexpected board departures.
The importance of succession planning has been increasingly recognised as a critical aspect of good corporate governance. The primary aim of succession planning is to promote the sustainability and long-term success of a given company by ensuring that the board is, and will continue to be, effective and composed of members who have the right mix of attributes, diversity, skills and experience.
Failure to focus on succession planning at board and senior management level as a long-term and continuous process, could result in an ineffective and insufficiently diverse board and senior management team, which in turn creates a risk to the company’s long-term success.
Apart from ensuring that the board is comprised of members with diverse skills and talents essential for executing the company’s strategy and ensuring long-term success, the aims and advantages of good succession planning include:
Authors: Beppe Degiorgio, Luke Hili
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- Establishing a board of optimal size, with a balanced mix of non-executive and executive directors, each effectively fulfilling key board responsibilities.
- Being prepared to replace executive directors and senior managers in the event of planned or unexpected departures of current executives.
- Effectively managing talent among senior executive leaders to support their career growth and promote retention of high-performing managers.
- Cultivating a pipeline of new senior managers and potential executive board members for future leadership roles.
- Promoting diversity within the board and senior management team by actively seeking and emphasising the inclusion of individuals from diverse backgrounds.
- Regularly refreshing board membership to prevent stagnation and promote innovative thinking, avoiding conformity bias.
- Enhancing company resilience by implementing staggered board changes to ensure continuity and facilitate smooth knowledge transfer to incoming board members.
- Instilling investor confidence in the board’s resilience and effective management of board membership.
- Utilising outcomes from board and senior employee evaluations to inform and refine board and senior management succession plans.
- Facilitating more effective negotiations on remuneration for retaining or hiring executive directors and senior managers based on board evaluations and succession plans.
Authors: Beppe Degiorgio, Luke Hili