The best-governed companies take the issue of lead director succession as seriously as CEO succession—and they should. Board dysfunction can erode both shareholder value and trust between the board and management. It is also a distraction that can take the CEO’s time away from running the business. Yet, despite the importance of the lead director role, very few companies are making lead director succession a top priority. In fact, many companies simply “pick someone” rather than design or plan a thoughtful process tied to the forward- looking needs of the company and the CEO.
From ad hoc to process
Board member selection is always critical; this is never more true than when choosing the right person to be the lead direc- tor. These placements are more difficult to undo than management selections, yet they often fail the test of process and rigor. How can boards put structure and discipline around this all- important decision?
Proper process starts with developing, in detail, the forward-looking criteria that the lead director should possess. Decision-makers should gather input from multiple stakeholders, including the entire board, the CEO and, in some instances, the management team. Through this fact-finding exercise, the company aligns itself around what it needs and expects from this critical role, ultimately lead- ing to a more successful selec- tion. Soliciting feedback from a variety of sources both within and outside the company can provide clarity about the expec- tations of what is sometimes a nebulous position within the board.
From a process perspective, it is important to think ahead so that the company is not conduct- ing lead director and CEO successions at the same time. Plan- ning these events well in advance is critical, particularly since the lead director should play a primary role in running a planned CEO succession process. Further, lead directors are often called upon to step in on an interim basis when there is an unplanned succession event. Most recently, Neil Austrian stepped in as interim chairman and CEO at Office Depot when Steve Odland resigned; earlier, Robert Druskin served as interim CEO at E*Trade Financial when Don Layton retired and Robert Matschullat filled in as interim chairman and CEO at The Clorox Co. when Jerry Johnston suffered a heart attack. Needless to say, having an established lead director in place can provide stability during a CEO succession, which is a situation that is often fraught with risk and uncertainty.
Identifying potential lead directors should actually begin earlier than one might think—at the time of initial recruitment. When a board is recruiting new directors, it should keep in mind those candidates who might be able to step into the position of the lead director one day, apply- ing the same thought processes used when adding a senior ex- ecutive to the company. Having more than one option is ideal, so that the board can select a can- didate based on the best fit for the needs of the company and the CEO at the time. The Num- ber-One way to mitigate risk is to give yourself options.
The best lead director?
The best lead directors bring a perfect mix of substance and style to the job. From a style perspective, the role requires a combination of interpersonal, advisory, leadership and Socratic skills. The lead director must have a strong relationship with the CEO and be able to effectively interface with the board. These directors also need to have a broad range to their style, with the agility to move from facilitator to coach to strong leader. Advisory skills are critical when it comes to the lead director’s rela- tionship with the CEO. It is imperative that the CEO completely trusts the lead director to both effectively probe and challenge, as well as to be a strong supporting voice when needed.
For the most effective interface between the CEO and the lead director, “fit” should be assessed. From a CEO’s perspective, this will require the lead director to be mature in the sense of knowing the line between governance and management; every CEO has had a lead director or board member who becomes too “executive.” In the post-financial crisis era, even more so than in the post-SOX years, boards have moved into management’s space. The lead director needs to have the discipline to maintain the fine line between gov- ernance and managerial oversight. Recently retired CEOs often struggle with this; they typically need two to three years out of the role to hone their director skills before taking on the lead director role.
From an experiential perspective, succession expertise is important, though often overlooked. It is one of the most critical functions of the board and one in which the lead director plays a crucial role. Let’s face it: very few directors have ever hired more than three CEOs. Therefore, this may rate high on the experience scale but low overall when one thinks of areas of expertise. It is also helpful for the lead director to have actually held the CEO title. Having the “battle scars” and experience in the corner office helps them to credibly coach and mentor the CEO and liaise with the board in a more effective manner.
Finally, the lead director should be someone who has the time to truly invest in the role. In other words, this cannot be someone’s fifth current board. The person selected will need to make the role a significant prior- ity in his or her portfolio. Assum- ing that other requirements are met, simply investing in the role can change the overall effective- ness of the person and make the difference between a good and great lead director.
The reality is that high performing lead directors are not born; they are developed and grown over time: Life experiences and a level of calm from having lived through a variety of sit- uations is crucial. The right candidates will embody a blend of executive and board experience with the right relationship touch to mold a board of high-powered directors into a cohesive team.
Theodore L. Dysart is a managing partner with Heidrick & Struggles, where he is a leader in the Global Board of Directors practice and a member of the CEO Search practice.