An exclusive extract from ICSA’s new book, The Non-executive Directors’ handbook, 4th edition
Listed companies are required by the UK Code (Provision B.2.1) to make available the terms of reference of their nomination committee, for example, on the company’s website.
ICSA has issued guidance on the terms of reference for a nomination committee, including model terms of reference. These can be downloaded from the ICSA website. The guidance includes the following provisions.
- Appointments to the nomination committee should be made by the board, for periods of up to three years. The board should also appoint the committee chairman, who should be either the chairman of the board or an independent NED.
- Only committee members have a right to attend committee meetings, but the committee may choose to invite other people to attend, such as the CEO, head of human resources and external recruitment advisers, as and when appropriate.
- The terms of reference should specify the number of regular meetings of the committee each year. The ICSA guidance suggests two meetings a year to conduct routine business, although additional meetings may be required when a new appointment to the board is being made.
- Committee meetings should be called by the committee secretary (who may be the company secretary) at the request of the committee chairman.
The duties of the nomination committee should be:
- to review regularly the structure, size and composition of the board and make recommendations (to the board) for changes;
- to review the results of the annual process of board performance evaluation that relate to the composition of the board;
- to keep under review the leadership needs of the company;
- succession planning for directors and senior executives of the company;
- to identify candidates to fill vacancies on the board of directors, as and when these arise, and from the candidates who have been identified, nominating individuals for appointment, for approval by the full board;
- to recommend (to the board) appointments to the board committees;
- to recommend whether non-executive directors should be reappointed on the expiry of their current term of appointment (having regard to the need for continual refreshing of the board membership);
- to recommend whether the board should propose any director retiring by rotation (in accordance with the company’s articles of association or the UK Corporate Governance Code) for re-election by the shareholders at the next annual general meeting;
- to arrange a periodic review of its own performance and recommend to the board any changes that it considers necessary; and
- to produce a report about the activities of the committee in the annual report to shareholders.
Changing the structure and composition of the board
The nomination committee is responsible for keeping under review the balance of skills and experience of board members, and ensuring that new appointments will help to achieve or maintain a balance that is appropriate for the needs of the company.
To comply fully with the UK Corporate Governance Code, nomination committees should carry out regular reviews of the structure and composition of the board, and recommend changes to the main board. The emphasis of the UK Code is on regular refreshment of the board.
This proactive approach is in contrast to a reactive committee, whereby the committee begins a search for a new board member only when asked to do so by the board, or only when a vacancy occurs.
Although the nomination committee is given the responsibility to make recommendations for new appointments or other changes to the board, it should be expected to listen to the views of some non-committee members. In particular, if the board chairman is not a committee member, their input may be valuable. The Guidance on Board Effectiveness comments:
‘The chair’s vision for achieving the optimal board composition will help the nomination committee review the skills required, identify the gaps, develop transparent appointment criteria and inform succession planning.’
The Guidance on Board Effectiveness also suggests that diversity of personal attributes is also important and that directors should have the ability to listen carefully, forge relationships and develop trust. Diversity is important to ensure that a board is not composed solely of like-minded individuals.
Filling vacancies on the board
Planning for the continual refreshing of a board of directors should be seen more as a process of maintaining an effective board by bringing in new skills and experience, rather than getting rid of ineffective board members. It should be a natural process of change and development.
The need for diversity in board membership is explained in Chapter 3, but diversity does not simply mean greater representation by women.
There are various factors to consider when planning board succession and changes to the board size and composition:
- NEDs should be appointed because they will bring particular skills and experiences to the board, but they are typically appointed for a fixed three-year term, which may then be renewable at the end of each three-year period. However, they should not necessarily expect a renewal of their contract at the end of its term: they need to be aware that their appointment may well be terminated in order to bring new ideas and new experiences to the board, with new appointments.
- The skills and experience required from board members may change as the company grows. For example, if a UK-based company expands overseas, it might be appropriate for the board to consider new appointments of NEDs with knowledge of the overseas business and its environment.
- The requirement to increase the proportion of women on the board should also be taken into consideration in planning board composition over the next few years.
- In some cases, NEDs may be replaced because they are not contributing enough to the work of the board. However, this is not the main purpose of a review of board composition.
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Published by ICSA Publishing on behalf of the Non-executive Directors’ Association