Succession planning comes under investor scrutiny

A new report by one of Australia’s largest fund managers reveals that shareholders are increasingly interested in how succession planning drives the quality of a company’s leadership and equips it to tackle its challenges.

AMP Capital’s Corporate Governance Report for 2013 notes that following the global financial crisis and credit crunch, shareholders were very focused on how companies used their capital and handled their cost pressures, including the reigning-in of executive pay.

“As we move beyond the financial crisis, it is clear investors are now focused on moving forward,” the report observes. “As Australia is in this rebuild-refocus-revitalise phase, there is increased interest in the quality of Australia’s management and whether it is up to the task.”

The report notes that the greatest proportion of a company’s value is not attributed to tangible assets (such as plant, equipment and inventory), but rather to intangible factors (such as skills, talent, intellectual property and licence to operate).

“Hard assets alone don’t generate returns but, rather, it is how those assets are managed, financed, developed and protected that will have a far greater impact on the long-term sustainability and profitability of the operation.”

And, this is where the importance of the quality of a company’s management and succession planning comes in.

“When shareholders decide to invest in a company, the decision is based on particular risk-return assumptions and an expectation that the company’s board and management are in a position to deliver those outcomes,” the report states.

“The sudden departure of a CEO can be very disruptive to a company that has no succession plan in place. 

“Boards need to know where the company is going and the CEO skills needed to take them there. Boards that spend time on succession planning are able to focus on those skills and develop staff accordingly.

“While it is not always practical, or possible, to have a CEO replacement ready in the wings, research has shown that it is usually preferable for companies to appoint an internal candidate.

“Not only are internal candidates able to ‘hit the ground running’, but the transition tends to be far less disruptive and far less costly - unless significant cultural change is required.”

AMP Capital notes that the issue of leadership succession in general is gaining further prominence through both the work being done by The Centre for Leadership Succession and also specific requirements that were incorporated into the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations.

While not specifically relating to senior management, the ASX principles highlight the importance of board renewal and succession planning.

The third edition of the principles was released last week and introduces nine new substantive recommendations which directors should understand.