A Tale of Two Corporate Governance Codes
While the importance of the Audit and Risk Committee is undisputed, and the Remuneration Committee Chair sits in the Hot Seat, the Nomination Committee frequently attracts much less attention. But should it? With so much governance focus in the UK and internationally on risk and pay, are we taking our eye off the ball on Nomination Committee?
As a Board Search and Evaluation firm, Fidelio works with and encounters a number of Nomination Committees and they vary in their effectiveness. Nor are we alone in noticing this.
At a recent Fidelio Board Breakfast “Engaging with Active Shareholders”, our speaker – a well-regarded long-only investor – commented on the Nomination Committee frequently being the weakest Board Committee. He then pointed to the Swedish market where shareholders drive the nomination process. Days later Fidelio spoke at a Conference on Board Evaluation and once again reference was made to the Swedish nomination process. It was even suggested that the Nomination process in Sweden also provides a form of Board Evaluation to the extent that it incorporates external scrutiny of the Board.
The Nomination Committee can be a gatekeeper (for better or worse) to the Board and also responsible for attracting great talent into the Boardroom. It is essential to succession planning and Board and Executive composition. But shareholders and stakeholders too frequently lack confidence.
At Fidelio’s forthcoming “A Seat at the Table” we will be exploring with Chairs, Company Secretaries and investors – all with extensive international experience – what good looks like for a Nomination Committee.
And in this Overture we thought it timely to take a look at two distinct models for the Nomination Committee in the UK and the Swedish markets. Are there lessons to be learned and practices to be shared?
The UK Model
The UK Corporate Governance Code recognises the importance of a healthy nomination process but is not overly-prescriptive. It briefly outlines expectations of the Nomination Committee to lead the process for appointments and also to ensure succession plans are in place for Board and senior executive roles.
The board should establish a nomination committee to lead the process for appointments, ensure plans are in place for orderly succession to both the board and senior management positions, and oversee the development of a diverse pipeline for succession. A majority of members of the committee should be independent non-executive directors. The chair of the board should not chair the committee when it is dealing with the appointment of their successor.” (UK Corporate Governance Code)
Importantly the Nomination Committee is also tasked with overseeing the development of a diverse pipeline. This arguably extends the reach of the Committee beyond its traditional narrower remit of senior appointments and empowers it to think structurally about the talent pipeline throughout the organisation.
In terms of composition, the majority of Nomination Committee Members should be independent Non-Executive Directors.
Reflecting the central importance of appointments to the Board, the Nomination Committee in FTSE companies is frequently chaired by the Chair of the Board. For evident reasons, the Code includes a provision that the Chair of the Board should not chair the Nomination Committee when it is dealing with the appointment of her or his successor.
And to provide shareholders insight into the work of the Nomination Committee, the Code recommends that the Committee’s work should be described in the annual report, including:
- the process used in relation to appointments, its approach to succession planning and how both support developing a diverse pipeline;
- how the Board Evaluation has been conducted, the nature and extent of an external evaluator’s contact with the Board and individual directors, the outcomes and actions taken, and how it has or will influence Board composition;
- the policy on diversity and inclusion, its objectives and linkage to company strategy, how it has been implemented and progress on achieving the objectives; and
- the gender balance of those in the senior management and their direct reports.
For sharehoIders concerned about Board composition and the effectiveness of the Nomination Committees, this reporting framework is a good basis for questioning the Chair and the Board. Shareholders can be more proactive here and should push back if answers aren’t forthcoming.
And the Swedish version
The Swedish governance model is clearly attracting attention internationally.
In terms of composition Boards of Swedish companies comprise entirely or predominantly Non-Executive Directors. The majority of these Directors are independent of the company and its management, and at least two of Board Members should also be independent of the company’s largest shareholders. As such, Swedish Boards may well comprise a majority of Board Members with close ties to the majority shareholders.
The code refers specifically its positive view of active and responsible ownership.
“This is in line with the positive view of active and responsible ownership expressed in the ….. Swedish Companies Act” (The Swedish Corporate Governance Code)
Swedish companies are required to prepare the election of Board Members and the auditor in a structured way through a Nomination Committee. The Nomination Committee is tasked with the following:
- Proposing candidates for the post of Chair and other Members of the Board, as well as the fees and remuneration to other Board Members
- Taking take account of the Board Evaluation and also the breadth and diversity of skills and backgrounds that the Board requires to be effective.
In terms of composition, the Nomination Committee should have at least three Members, one of whom is to be appointed Chair. The Chair of the Nomination committee cannot be a Board Member of the company – a major difference with UK corporate governance. The majority of Nomination Committee Members should be independent of the company and its executive management. The CEO cannot be a member. At least one member of Nomination Committee is to be independent of company’s largest shareholders in terms of votes or group of shareholders.
And with regard to disclosure, the composition of the Committee must be published on the website including if appointed by a particular shareholder/owner. The website should also make clear the process by which shareholders can submit recommendations to the Nomination Committee.
The Nomination Committee then presents its list of recommendations to the Shareholder Meeting, explaining how and why it has come to these recommendations and how these meet the requirements of the Board, including with regard to diversity.
What emerges is a Nominations process which demands a lot more of shareholders and equally provides shareholders with an active role in evaluating the Board and determining its composition.
Nomination Committee: what works
The UK and Swedish models represent two different approaches to ensuring orderly succession and high calibre Board members. Clearly each Code reflects the specific legal and ownership structure of the respective market. For example corporate structures in Sweden have historically favoured a number of holding companies acting as long-term shareholders, as opposed to the more stock-market based system in the UK.
That shareholders should take an active role in the selection of directors may feel a little uncomfortable in Anglo-Saxon contexts, but arguably offers some real merits. Firstly, it ensures a genuine role for shareholders in influencing the Board composition (as opposed to merely registering an occasional protest at the AGM), and secondly it can foster alignment of interest between Board Members and shareholders.
This is consistent with the spirit of stewardship that is increasingly expected of investors, which in the UK has won political and public support but it is not always reflected by the short-term reality of financial markets and the financial incentives they generate.
Regardless of the governance structure and jurisdiction, Fidelio recognises the importance of the Nomination Committee and its contribution to addressing two key questions for the Board:
- Do we have the best mix of skills, diversity and experience at Board and Executive level to drive sustainable value?
- And does that composition reflect the expectations of shareholders and stakeholders and is the Board well placed to engage with the owners and those with a key interest in the company?
For Chairs keen to structure a clean and effective nomination process and for shareholders seeking assurance on Board composition, the Nomination Committee is key. And key deliverables for any Nomination Committee include:
- Build a clear view of current Board composition, with strengths and weaknesses and key gaps versus the requirements of the business going forward
- Assess the level of challenge around the Boardroom table. How diverse are the perspectives and is relevant diversity included?
- Consistently review market for potential Board talent. With visibility of Board terms and refreshment, Nomination Committees can take a medium term view
- When it comes to refreshment, take the time to construct a clear and arm’s length selection process including the appointment of a search firm or alternative; clear articulation of the role; the willingness to look beyond narrow silos; an effective induction programme
The Nomination Committee may well be overshadowed by Board Committees which are much more in the limelight. But it has a core role to play and if it fails in this, Board composition and effectiveness will suffer.
Chairs and shareholders need to be sure the Nomination Committee is no Cinderella.
And while there are different structures and approaches there is also good common practice in the work of the Nomination Committee. This a theme we will pick up with Chairs, Company Secretaries and investors at Fidelio’s forthcoming ‘A Seat at the Table’ Programme.
For more information on how Fidelio can support your Nomination Committee through Evaluation, Development and Search contact Gillian Karran-Cumberlege on email@example.com