Governance Bites #22: succession planning for directors, featuring Mel Hewitson.

Mel Hewitson is a professional director, and a Member of the New Zealand Order of Merit. She holds a portfolio of independent director roles, including Fidelity Life, Southern Cross Health Insurance, Simplicity, the Domain Name Commission and Whai Maia (a company owned by Ngati Whatua Orakei). She is also a trustee of Foundation North (New Zealand's largest philanthropic organisation, and Australasia's second largest), and the Housing Foundation. 
Mark Banicevich asks Mel about succession planning for directors. They discuss board tenure, and how to manage director succession planning, including skills matrices, and recruitment. Mel also has some great tips for new directors, and gives her view of optimum board size.
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Transcript

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Hi. Welcome to Governance Bites. I'm Mark Banicevich, and today I get to spend time with Mel Hewitson. Hi, Mel. Hi, Mark. Thanks for being here. Thank you for having me. Mel is a professional director, and has been for about the last eight years, six of those full-time. And is now an independent director on Fidelity Life, Southern Cross Travel Insurance, Simplicity, the Domain Name Commission, and the Whai Maia company owned by Ngati Whatua Orakei. She's also a trustee on Foundation North, which is the largest philanthropic organisation in New Zealand, and the second largest in Australasia, and a trustee in the Housing Foundation - among other governance roles. So, really great to have somebody who is a professional director, and has been for quite some time, with the depth of experience, with me today. So, thank you very much, Mel, for your time. Pleasure. The conversation that we want to talk about today, is largely around succession planning. So, my first question for you is, why should a board have succession planning? What's important about it? Well, a board always needs to be operating at its optimal, you know, the best it can possibly be. And, you know, you need to be able to plan for the expected, as well as the unexpected. And all of this while also operating in an environment which is changing. Whether that's your competitors, the market, climate,- Technology. - technology, absolutely. And so, it just really helps for a degree of planning for those changes. Both in terms of things that happen to you, but also helps you be more proactive. For example, if you've got a change in your strategy coming up in the future, in your strategic horizon, that requires different skill sets on the board, it just enables you to have a plan for doing that. Right. So is there a, kind of, a natural time period that a board member can, kind of, at the far end, add value to a board? But which, you know, at which point you go,"Oh, actually - it's been a long time now, it might be time to step down?" Yeah, it's a really important question. Often I, if there is a number, I tend to see it around that twelve-year mark, is enough to get board refresh. And if you're an independent director, you'd have to question whether 12 years actually makes you not very independent anymore. Yes, absolutely. So, ideally, you know, a board will set itself up with rules. Whether they're, you know, in the constitution, or in their board charter, that will just put some guidelines around that. Both in terms of maximum time, you know, or tenure on the board. But also, what a term length is, and any conditions around reappointment. Right. And while there can always be extenuating circumstances that may lengthen it out in some rare cases, as you've suggested, there may be reasons to change directors when the needs of the organisation change. Particularly around strategy, or around circumstances going on in the environment. There may be personal reasons for a director to step down. They may age, or have family commitments, or whatever, that may be - there may be just come a time where, as you say, that they've just kind of run their course. They're no longer independent. They're no longer adding the value they were at the start. They don't have the energy they had at the start. So, these are all reasons that you need to change directors at some point in the entity's life. So, with that need to change directors, how should a board go about planning the succession? I mean, I think, you know, my comments are really with the caveat that every board is different. It will have its own unique circumstances. Wherever it may be. Whatever sector it's in. There'll be a lot of reasons for variation. But good practice generally starts with putting together a skills matrix. Right. And it needs to be one that is nuanced and tailored very much to the circumstances of that particular board. Rather than, you know, just pulling something, you know, off the shelf, that someone else has used. So, does that suggest the skills matrix itself would change as the strategy changes? As the environment changes? Could do. Yeah, it could do. It could do. So, you know, it will take into account, you know, where you are at the moment. Where you see your strategy, you know, taking you in the future. Changing needs, like that. Right, so. Diversity aspects, you know, as well. As different stakeholders have different views. So it very much does need to be nuanced. Right. And it can be a really great tool for sitting around a table as a board and unpacking in quite some detail, what skills you do need. I mean, you might typically see financial skills, you know, on a skills matrix. But what do you actually mean by that? Right. You know, or ESG [environmental, social and governance] skills, you know. Do you, therefore, mean somebody that's come from perhaps an executive role with ESG reporting? Or do you actually mean somebody who's got experience in integrating ESG into strategy? Right. So that's what I mean by nuance. Yes. Really thinking through and articulating, what it is the board really needs. Yeah, to take your finance example, you know, finances can be very different at different types of organisations. You're on a couple of insurance boards, and you've got IFRS17 [International Financial Reporting Standard 17] to deal with. You've been on investment boards, and, you know, finance and investment world can be quite different. And then, of course, finance and manufacturing environments, and stuff, have got their own challenges. So, yeah, I can understand that concept of having a skills matrix, being a list of different skills that the board would like, to have. Nuanced, as you say, for the specific needs of that entity. And then identifying who on the board has those skills, and what gaps you have, and using that to identify people to bring in. Is that? Yes. And I think it should also, another lens that should also be applied, is the sort of skills you need for chairing. Whether main board, or committees. Yes. It's also helpful to have a diversity profile. Which can be tricky, because you risk pigeon-holing people, and box-ticking. But it does give you a picture of the diversity of skill sets that you've got across your board. Including life experience. And, as more companies get more mature, and thinking about, you know, diversity, equity and inclusion [DEI], there may be questions, such as, you know, do we need to have more people on our board that, sort of, represent our customer base? Or if you've made a Te Tiriti o Waitangi [Treaty of Waitangi, founding treaty between Maori and English colonists] commitment, what does that mean for the makeup of your board, as well? And some sort of prioritising around those skill sets always help. Because, at  the end of the day, you've only got so many people sitting around the table. You don't want to have a board of 20! Yes. And there may be certain capabilities that you can find from time to time, outside of the board. You know, you can contract in legal skills when you need. You could potentially have an advisory board. Or maybe you've set yourself up to have a future director who could bring a different lens, you know, into that mix. Right. So coming back to the question then, what are some ways that a board can go about planning succession for its directors? So, you talked about the skills matrix, as one, as a good example. So, I think, I mean, a practical thing to do - and it's greatly helped if you've actually got terms fixed, because, you know, exactly when different people are coming off - is to really just map that against the skills. And if you run those two things together, you can very quickly identify where you've got gaps. Which risks, obviously, blind spots, on the board. And also, where you've got concentration - Right. - of skill sets. Which, you know, also doesn't help diversity to a huge extent. So, that's really quite helpful. It will also help show you where you've got, in that kind of staggering, you've got certain skill sets, that you know are going to be lost with the exiting of one director. But actually, someone's coming up behind that has those. Right. So, maybe, when you go out to, you know, recruit a new director, you don't need to worry quite so much about those skills right now. Yes. So, you mentioned there someone's coming up behind that has got those skills. Is that somebody who's already on the board, or somebody that the board's, kind of, got their eye on? To say, “that's the next person in line”? Well, typically, it would be people who are already on your board. Right, yes. And so, you might have a chair of an Audit and Risk Committee. And you know that their term-end is coming up. Who have you got on the board already, who could step into that that role? Ah, yes, okay, I understand. And then, what kind of backfill do you have to take from that? What kind of leadup are you talking when it comes to actually recruiting a replacement? So, if somebody, for example, has got three, six months left in their term, at what point you start saying,“Okay, we're going to start looking now”? Well, I think, if you've got the benefit of being able to plan. That somebody hasn't resigned at short notice. It can take that long. If you're going to go through a full-some, open, skills-based process. You're either, that will involve either advertising, or a combination of that, together with the use of a search firm to help. And that all takes time. And certainly, some directors may not be available when you want them, either. A little bit like senior executives. You've got to wait for a bit. Yes, yeah. Particularly, I mean, you've got a portfolio, now of, you know, eight or so boards. So there's only so much you can take on, for your capacity, right? And so, yeah, I can absolutely understand that. That's right. What are some of the other challenges, then, to effective succession planning? I think small boards have a challenge, because you've, you know, you've only got, you know, a certain number of people to accommodate a lot of skills that you might need as aboard. And that really starts refining that conversation into, what are our skill priorities? What do we really need? Where can we compromise? How can we get those skills, you know, in another way? Or can we find somebody who happens to have a lot of those skills, you know, bundled up in the one human body? Yes. And, I think, the other big challenge that, or another big challenge is, if you've got, perhaps directors who have been on the board for a long time, they enjoy their roles, but you don't have anything written down on tenure, or term length. Yeah, right. And it can become a very difficult conversation to say, you know, “Actually, we need to create a space."- It might be time to move on. - "Because we need some new skill sets.” Yeah, right. So, all of that is made a lot easier if you've got your skills matrix from the outset. You've had that discussion on the board. So that the planning doesn't create any surprises for people down the track. It can become a very open conversation, right, with that framework in front of you. Yeah. And that's where the chair comes in, you know, quite importantly. Because when the chair has their one-on-ones with directors, they can start to socialise those discussions. Before we started recording, you mentioned earlier about an appointments panel. How does that work? Or the appointments committee that that you were on. You mean, like a nominations committee? Sorry, yes. Absolutely. And larger boards, in particular, will have a nominations committee, which is a group of board members who will, you know, one of their key purposes, is to find, and go take - lead the process - for appointing directors. Right. And short list. And then, - Yeah. - right. And sometimes, you'll find it in the Crown environment, where you need a double arm’s length separation between the political realm and the business realm. And so there might be some independence on that committee, - Right. On the Nominations Committee, as well. - to assist, run the process. Okay. Other companies might include it as part of their, kind of, People and Culture Committee responsibility. Or just bring together a subset of the board at the time that they need to. That's the way that I've seen it done. So, what do you think, then, is the optimum size of a board? You talked about board size before. What sort of range of numbers would you expect? You talked about small boards. Where do you think the, kind of, right size is? Oh, it's an often asked question. Look I, my personal view would be, it sort of, sits somewhere around eight, you know. But, again, it depends very much on the context. Yes. You might have a company structure, where the, you know, major shareholders have got a right to have a person on the board. Yes. And if you're still trying to make room for a majority of independent directors, then that automatically bumps up, you know, your numbers around, sitting around the board table. Yes. Most constitutions I see would have a range. And then that comes down to the skills matrix, and making sure that you've got the right number of spaces to accommodate the skill sets that you need around the table. And it's more challenging for a chair if you've got too many people sitting around a table, as well. Absolutely. You know. But, you still need enough to be able to cover off the skill sets. And to get that diversity of view points, and so forth. Exactly. And fulfil your responsibilities. Okay. Well, I guess one final question then, although you may have a few different points to bring out in this one. In your experience as a director, in your experience in governance, the training you've received in this space, what's the best advice you've received? Or what's the best advice you would give to somebody who is embarking on a governance journey, or is early in their journey as a director? I've been the beneficiary of some very generous spirited people in my time. And so, I'm not sure what I say is particularly original. But it's helped me. I think a key thing that, a piece of advice that was given to me is, do your due diligence before you accept a position on a board. And especially when it's your first one, it's very flattering. And you're really keen to, you know, get the first one in your portfolio. But you need to remember that you're going to be relying on the people around that table. Including when the times get tough. If you're wanting to grow, and be a better governor over time, you're going to be relying on those people to be good role models of what good governance looks like. And so, I think, you know, that is really good advice. You know, you want to get going. You're very keen. But I would say, definitely, - You are taking on some significant liability, right.- do your due diligence. Yep, you are. So you don't want to do that lightly. And a good board should understand that. And they should be able to provide you with the information that you feel that you need in order to be able to satisfy that for yourself. Right. Okay, yeah. Any other advice that you would give, or you've received? Oh, a lot. I think one of the fundamental questions is, do you really want to do it in the first place? I mean it - governance - sounds glamorous, but it's not really. It's hard work, if you're doing your job properly. You know, have you got the personal attributes. If you've been in an executive role, can you make that transition between, you know, from a fingers-in management-style, to a, you know, a fingers-out, you know, governance approach. You know, you're very much on the hook. You know, do you have the resilience to stick with it when times get tough? It's not the best paying role that you can take on. It can take time to build up your portfolios. So, I'd be cautious around expecting that you can match your, you know, your last executive salary through a board career. And it's definitely not a quietening-down of a career, in a workload. You know, depending on how much you take on, it can be very much a ramping up. I think, when you're going out and looking for your first role, make yourself known to people who have got reach into potential opportunities. I was really surprised how many of the executive search firms, actually also have board appointment services. Yes. And those individuals can also be very good at giving you advice. Bringing a dose of realism. Yes. Some of them specialise in particular sectors. And so it's useful to know that. And quite a few have said to me, and perhaps New Zealand being, and the culture we are, makes us easier. You know, identify boards that you particularly want to go on. Do your homework on them. Try and work out when they might be having a director rolling off. And pick up the phone. Contact the chair. Take them for a coffee, and talk about it. Right. As I said, show you've done your homework. Have thought about the sort of skill sets that you bring, and how those skills might fit with what's already around the board table. And it's not a desperate conversation. It's a genuine one, about you asking, you know,“What do I need to do to be ready for your board?” Based on the work that, you know, you've already done, to have a bit of an understanding. Fantastic! So, it's something that I haven't done myself. Yeah. But it has been mentioned to me several times. And maybe that's useful. I think the search firms, also, are going to play an increasingly important role as boards get much more professional. They recognise that shoulder-tapping isn't quite what they should be doing anymore. They really need to be focusing on a good skills-based appointment process. Where not just hard skills, but they also get insights into the softer skills that board members can bring to the table. Because that, board dynamic is just so critical to it functioning effectively. Right. And, you know, a DIY [do-it-yourself] board director search may not always pick those things up. You can gain a lot from having experienced people, who've met a lot of potential candidates, and can help you with that decision. Yeah, absolutely. And getting that diversity of style around the board table, so that not everyone wants to be a chair, for example. And you've got the right balance of, you know, the cheerleaders versus the challengers. Right. Okay. I'm going to squeeze in one final question around the portfolio that you have. And you talked about how some of the recruitment advisers are specialising in industries. How do you balance your portfolio, so that you can have the industry experience shine through, but not create conflicts between the boards that you're on? Yeah, it's a good question. Because naturally you gravitate to your sweet spot. Which tends to be where you spent your executive career, right. Yes. And, I think, in some Industries it's easier to do that than others. But for me, I've just found in the financial sector that the, you know, having a balance of, you know, insurance, and different types of insurance. Obviously, you know, funds management, but providing different types of services, helps with that. Right. But you can never get away from the need to really interrogate what are the conflicts, or the potential conflicts, if I take on this role. In terms of what could arise in the day-to-day. But also, the perceptions of other stakeholders. Particularly, in a regulated environment, and in sectors where, you know, stakeholder trust is so important. And a sign of a good board, if you're joining them, is if they take that conflict discussion very seriously, Right. I think. Well, Mel, thank you very much for your time. That's been a great conversation. I really appreciate it. I look forward to catching up again soon. And see you next episode. My pleasure. Thank you. Thank you.