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The fairest of them all

07 June 2016

Nom com: The fairest of them all - read more

There are huge opportunities for company secretaries in supporting the nomination committee

In recent years the role and functioning of the nomination committee has received scant attention in comparison with the audit and remuneration committees. Yet it is the most important of all board committees. It determines board composition – hence ultimately board effectiveness – and is a vital ingredient for the long-term success of companies.

A new report, ‘The nomination committee – coming out of the shadows’, produced jointly by ICSA and EY, aims to bring it to its rightful place in the light. The report draws on a series of roundtable discussions with board and nomination committee chairs and company secretaries from over 40 FTSE 350 companies, and concluded with 12 key questions for boards and committees to consider (see next page).

A varied approach

Unlike the audit and remuneration committees, there is no natural reporting or regulatory cycle for the nomination committee. Not surprisingly, therefore, we found a wide variety of approaches to the function of the nomination committee.

Reasons for this include the size of the company, the size of the board, the sector in which it operates and the stage of its development.

Traditionally the committee has been seen by many companies as having a purely reactive function – it is something to be dusted off when a non-executive director notifies you they intend to step down. But that seems to be changing, and it is changing in three significant ways:

  • Boards and committees are thinking further ahead than the immediate replacement of a retiring board member
  • They are looking more deeply into the company to identify and help to develop its future leaders
  • They are casting the net more widely to identify potential directors.

Take early action

It is important to extend the horizon. Boards already look much further ahead than the next 12 months when developing their business strategies. In doing so, they need to anticipate the changes and challenges ahead and take early action to ensure they have the necessary resources to deal with them. This should include the resources around the boardroom table.

Of course, it is not easily done. Trying to identify internal and external candidates who would be ideal for the next-but-one business or board cycle is not straightforward.

It can also be undermined by changes in the company’s circumstances and those individuals’ own career plans. Although it is encouraging that at least some companies are making the attempt.

It is also encouraging that boards and nomination committees recognise that they have a role in talent development. Exactly what that role is, and where you draw the line between appropriate oversight and unwarranted interference, is more difficult to define and should be a subject for discussion with management.

In principle it makes sense for the board, through the nomination committee, to take more interest in identifying executive talent. After all, it is the board that is responsible for ensuring the long-term success of the company.

Board members need to be satisfied that there is a pipeline of talent that will sustain the company over 20 years or more. When the average tenure of a FTSE CEO is less than five years, it is unrealistic to expect them to take sole responsibility for that pipeline.

Nurturing the pipeline

Many companies now see the role of the board and committees as extending beyond just satisfying themselves that management has appropriate programmes in place.

We heard that in some companies the non-executive directors had helped promising executives to become ‘board ready’ through mentoring or using their contacts to identify non-executive positions in other organisations. Committee members are also keen to see more of managers below executive committee level in order to assess their potential.

Some of the companies we spoke to said that they started to pay more attention to the executive pipeline as a response to the debate on gender diversity. Yet having done so, they have found that it has a value that goes beyond that specific issue.

The same can be said for the efforts companies are making to widen their search for potential non-executive directors. There was recognition among many of those we spoke to that relying solely on personal contacts and other ‘traditional’ methods of recruitment may no longer be sufficient.

Partly this reflects a growing awareness of the benefits of, and demand for, more diverse boards. However, it also reflects changes in the skillsets needed at board level – for example, an understanding of the impact of digital technology – because of the rapidly changing business environment in which many companies operate.

The recruitment process

There are a number of stages to the recruitment process. The first is specifying the skills and attributes needed; the second is identifying candidates that meet that specification; and the third is short-listing and the final selection.

The companies to whom we spoke have recognised the need to get the initial specification right. Although not necessarily finding it easy, most have a process in place, with the use of tools such as skills matrices now apparently being fairly common.

The picture was a bit more mixed on second stage – identifying candidates. Some companies said that, with prodding from the committee, search firms had been able to identify candidates that fitted the bill but did not have prior experience in the listed sector, for example. Others were less positive.

But for both of those stages, we heard plenty of examples of how companies had developed processes and approaches to help them achieve their objectives. Some of these are identified in the report, and hopefully they will help other committees with their own thinking.

In some ways it is more difficult to identify good practice for the final selection decision, because inevitably there is a degree of subjectivity involved. That may be unavoidable. Bias, on the other hand – whether conscious or unconscious – is avoidable.

So although it is not possible or desirable to prescribe the factors to be used when selecting directors, or the relative weight to be given to each of them, we have identified some questions that committees should ask themselves. They include:

  • If ‘character’ and ‘constructive challenge’ are important considerations – as we were told they are – how do you assess them? 
  • How do you ensure that the understandable desire for new board member to be a constructive member of the team does not lead you to favour ‘people like us’? 
  • If the most skilled candidate does not have prior board experience, rather than turning to the second best candidate, are there things you could do post-appointment to enable them to provide full value as a board member?

There are two huge opportunities here for company secretaries. Firstly they can support the nomination committee to take a more holistic view of their role and to look both at the future structure and membership of the board as well as the pipeline within the company.

Secondly, they can develop and demonstrate those skills which will make them, in their own right, the ideal NED – let’s face it, few have more boardroom experience.

Read the key questions for boards and their nomination committees to consider from the report.

You can read the full report, ‘The nomination committee – coming out of the shadows’, on the website.

Chris Hodge is Policy Manager at ICSA: The Governance Institute

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