Recent events in both the public and private sectors are again highlighting the key role that proper succession planning plays. Photo: File

DURBAN - Recent events in both the public and private sectors are again highlighting the key role that proper succession planning plays in supporting any organisation’s sustainability, particularly when it comes to Chief Executives and governing-body chairs. 

Poor succession planning inevitably creates a leadership vacuum at both governing body and executive management level resulting in a loss of the longer term strategic focus. The impacts of this uncertainty can be dire, said Richard Foster, facilitator at the Institute of Directors in Southern Africa (IoDSA).

Impacts can include a loss of performance delivery influenced by such factors as possible churn at the senior management level, the loss of market share to more focused competitors, severe reputational damage and erosion of investor and other key stakeholder confidence in both the governing body and senior management alike.

"Because good governance relies on effective leadership, succession planning receives significant focus in King IV. In addition, its five sector supplements deal with the specific issues relating to succession planning in different contexts," noted Foster.

The position is particularly complex when it comes to state-owned entities (SOEs) because certain appointments like the Chief Executive and governing-body chair are typically mandated in legislation or founding documents. The shareholder thus plays a key role, and the process is not as easily aligned with what is considered governance best practice, he says. A similar situation exists in local government. 

One mark of the difficulties of proper succession planning at SOEs is the reliance on interim appointments. However, they inevitably create uncertainty unless they are well thought-through and the process is properly communicated to stakeholders.

He said, "One of the governing body’s primary functions is to create and oversee the implementation of strategy, implying a three-to-five-year, or even longer timeline. Interim appointments, by contrast, tend to be operationally focused pending a permanent appointment".

King IV recommends that governing bodies should ensure succession plans exist for their own members, as well as for the Chief Executive and executive management team. However, because succession planning is intimately connected with the appointment of these senior office-bearers, succession planning for SOEs is, as previously mentioned, more complex and challenging. 

Typically, the shareholder/executive authority (ultimately the government) has the power (or obligation) to appoint the chair and/or the Chief Executive and/or other governing-body members. In its SOE Sector Supplement, King IV recommends that these appointments should be accomplished via a robust and transparent process that involves the governing body (the accounting authority) as much as possible to give effect to the aspirations of the relevant principle.

"The processes for appointing Chief Executives or chairs at certain SOEs is sometimes questioned. The damage caused by unsuitable appointments is now plain, and both the organisations and the economy as a whole are affected," said Foster.

To align succession planning in SOEs better with governance best practice, the King IV SOE Sector Supplement recommends that the Chief Executive’s letter of appointment should clearly state that the Chief Executive is accountable to the governing body (rather than the executive authority i.e. shareholder), that the governing body and Chief Executive jointly agree on how the Chief Executive’s performance should be measured, and that the governing body has the primary responsibility for firing the Chief Executive.