Board composition is of critical importance for shareholders and stakeholders. How Board composition and Board appointments are achieved is also attracting attention. This Table Talk reviews the link between a robust Search process on the one hand, and attracting strong Board candidates and embedding diversity and independence on the other. It’s clear from Fidelio’s Board Evaluation and Search practice that Environment, Social and Governance (ESG) factors are gaining in importance for publicly quoted – and many privately held companies – everywhere. Recent high-profile governance failures combined with increased public awareness of ESG factors are prompting investment firms - as well as retail investors – to put pressure on Boards for change. Self-interest is also driving an increased focus on ESG factors round the Board table: clearly no-one wants to be implicated in the next adverse environmental report or social media firestorm. An aspect of governance that until recently has attracted relatively little attention is that of the search process itself. Some corporate governance codes are clearer on the subject than others: the current version of the German Code is very clear that candidates need to have the right skills and to have the time to devote to a Supervisory Board role, but it says nothing about the selection and appointment procedure. Similarly, the US Investor Stewardship Group’s Code is naturally keen on skills and diversity – the “what”, but says very little about the “how”. In contrast, the principles are clearly stated by governance codes in the Netherlands, and in the UK:
“The supervisory board should ensure that a formal and transparent procedure is in place for the appointment and reappointment of management board and supervisory board members, as well as a sound plan for the succession of management board and supervisory board members, with due regard to the diversity policy” (Dutch Corporate Governance Code 2016)
“Appointments to the board should be subject to a formal, rigorous and transparent procedure, and an effective succession plan should be maintained for board and senior management. Both appointments and succession plans should be based on merit and objective criteria” (UK Corporate Governance Code 2018)
Formal, rigorous, transparent – hard to disagree in theory, but many Board appointments still fail to meet these criteria in practice. It’s noteworthy that the UK Financial Reporting Council (FRC), which is responsible for the UK Corporate Governance Code, had to stomach criticism of its own Board appointment methods as part of a recent independent review led by Sir John Kingman.
A transparent approach to search makes a key contribution to increasing Board effectiveness; if there is a commitment to attracting the best talent and embedding diversity, the search process needs to be opening up routes to the Boardroom, not closing them down.
Fidelio’s checklist of key actions in a Board appointment process is as follows: 1. Define the role clearly: if done well, this acts also as a brief for candidates that will help position and market the role. Time is invariably well spent on aligning the Nominations Committee and agreeing the specifications and attributes up front, avoiding confusion and dissension later on. 2. Cast the net widely: this is the part of the search process that has been disrupted by the internet and social media; therefore Nominations Committees should no longer be satisfied with drawing upon a narrow pool of candidates. It is eminently possible to attract Board talent cross-border, cross-sector, cross-function. In most cases the “Talent Shortage” is a myth, and there is no excuse for a lack of diversity in candidates.
“The value of diversity at the Boardroom table is largely uncontested, but progress remains very slow… [the] lack of progress is not due to too few qualified female candidates – the problem is one of demand not supply” (Audit Committee & Board Diversity with Jan Babiak, Fidelio Board Breakfast 2018).
3. Decide how to decide: deciding who makes the decision and how. Agreeing the interview and selection process upfront and ensuring a level playing field allows candidates and the Nomination Committee to derive the insight and information needed to make a good decision and achieve the best outcome.
4. Project manage the process: it’s essential to regularly monitor progress, and this discipline reduces the risks that the search takes too long, fails to produce the required diversity, or fails altogether. In addition, project management reports can provide an audit trail to satisfy external stakeholder review of the process.
Scrutiny of the Board search process is still in its early stages, as its absence from the German and US codes (see above) shows. Fidelio sees considerable evidence that this is changing and shareholders and stakeholders care increasingly not just who is appointed but also how they are appointed.
This is a logical extension of the ESG trend already under way, and there is much evidence that a well-managed search is likely to result in a good outcome: that is, the appointment of a candidate who enhances the performance and effectiveness of the Board.
Hence, Chairs and Boards are paying greater attention to their appointment processes and ensuring that they are transparent and rigorous; the informal approach that has been common in many Board appointments is arguably no longer fit for purpose, in particular for a Board in the public eye.
For further details on how the governance of Search can strengthen Board composition and effectiveness, please contact Mark Cumberlege at mcumberlege@fideliopartners.com or call on +44 (0)207 759 2200.
