Succession Planning for Regulated Entities – The Key Elements

Author: Dr Matthew Muscat

The leadership, stability, strategic direction, diversity and competence of the individuals running a business are some of the essential ingredients needed for an enterprise, not only to survive but to succeed, grow and thrive. Succession planning seeks to ensure the stable continuity of these key elements in the event of anticipated or unanticipated vacancies within an organisation.

Succession planning (for directors and key function holders) is critical for any business, particularly for regulated entities subject to the supervision of various competent authorities. The Principles of Good Corporate Governance for Listed Companies (the “Code for Listed Companies”) have long recognised the importance of adequate succession plans or policies for directors and for senior managers. More recently, the EBA Guidelines on internal governance (the “EBA Guidelines”) and the Joint ESMA and EBA Guidelines (the “Joint ESMA and EBA Guidelines”) on the assessment of the suitability of members of the management body and key function holders under Directive 2013/36/EU and Directive 2014/65/EU implore credit, financial and investment entities to implement succession plans for board members and key personnel (such as the compliance officer, the risk officer, and the money laundering reporting officer). In addition, the Malta Financial Services Authority’s New Draft Corporate Governance Code (the “New Corporate Governance Code”) invites authorised regulated entities (such as credit and financial institutions, insurance undertakings, investment entities, company service providers and trustees) to implement succession policies for directors and for key persons. [1]

The ensuing paragraphs will briefly explain some of the main elements that ought to be contained in a succession policy.

Broadly speaking a succession policy should cover at least six key areas as follows: (i) scope and objectives; (ii) succession procedure; (iii) selection criteria for candidates; (iv) assessment of candidates; (v) review of the succession policy; and (vi) emergency provisions.

The scope and objectives section should refer to the document which obliges the entity to draft a succession policy. For instance, reference could be made to the Code for Listed Companies, the EBA Guidelines, the Joint ESMA and EBA Guidelines and/or the New Corporate Governance Code. This section should also explain the raison d’être behind the policy and should list the individuals to whom the policy applies to (such as members of the board of directors and key persons). The succession procedure should clearly set out the process for identifying potential candidates. The selection criteria should set out the measures employed by a company to identify potential or prospective candidates, as directors or as key persons. It is important that the procedure to appoint directors is consistent with the articles of association or any agreement regulating the appointment of directors such as a shareholders’ agreement.  The assessment procedure should refer to the criteria utilised by Board members to determine the fitness and properness of candidates. This section should also explain the interview process, the documents required to be presented by potential interviewees and how candidates will be appointed. The review section of succession policy is expected to indicate the frequency of assessment with respect to the composition of the Board and how regularly the Board should review contracts of employment or of service of key persons. Finally, the emergency provisions should set out the manner in which the Board plans to address unplanned or unexcepted departures and the interim arrangements to be implemented in those scenarios.

The foregoing elements should constitute the foundation of every succession plan. However, the exact elements could vary depending on the nature, size and complexity of the company as well as the articles of association of a company. For example, for some entities (such as listed entities) it is recommended to have a nomination committee to assist in the succession planning process.

Essentially, having a clearly drafted succession policy in place will help to maintain a sound degree of stability and mitigate risks that could arise from a change in management and/or leadership. In turn, a proper succession policy will help achieve continuity in leadership, stability, strategic direction, diversity and competence of the individuals responsible for running the business of the company.

For any further information or assistance on succession planning and policy drafting, kindly contact ARQ Advisory Director Dr Denia Ellul [email protected].

[1] The MFSA published the draft New Corporate Governance Code on 22 February 2022. It is important to keep in mind that this document is still in draft form as is not yet in force, as at the date of this article.