Nominations Committee: Raising the Bar
As day-to-day listed business announcements reveal unexpected high-profile departures and last-minute recruitment scrambles, how can Nominations Committees take a more robust, strategic and wide-ranging approach to succession planning?
Both regulatory and shareholder pressure on any Nominations Committee may well depend upon its company’s listed status or on its geographical location. This may influence the need for independent directorships for example, or an emphasis on gender diversity. But other pressures are dictated beyond geographical boundaries. They include the ‘growing pains’ of business linked to growth and globalization, for example. And no business today is exempt from shifts in technologies and markets increasingly identified as ‘game changing.’
Amid such a backdrop, the ‘refreshing’ of the board and senior management is increasingly seen as essential. Whatever the context, the outcome is undeniable. Businesses must constantly address the process that dictates by whom they are governed if they are not only to survive, but also to flourish. Resentment in any boardroom of outside pressure on appointments – on the need for gender diversity for example – can merely exacerbate internal issues for any listed business. For publicly listed businesses worldwide are facing rising demands from stakeholders in a key area: succession planning.
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What’s Next: Is the UK Leading the Way?
The UK’s Corporate Governance Code leads the way for much of the thinking on international corporate governance. In recent guidance around the Code the independent watchdog the Financial Reporting Council (FRC) also stresses the importance of succession planning. The need to pay attention to the broader themes of board evaluation, investor engagement, talent management and diversity has also been addressed publicly in recent months by the UK government's Department of Business, Innovation and Skills (BIS). It has echoed the call from David Styles, Director of Corporate Governance at the FRC on the need for companies to have a "clear and consistent policy" for appointments – not only to the board, but also with regard to senior management positions.
Mind The Gap: Between Vision and Action
Institutional investors in the UK may have become much more vocal regarding succession planning and greater attempts at engagement with boardrooms. But it is too soon to measure the extent to which businesses are listening. The reality of day-to-day listed business announcements, from Marks & Spencer to Tesco, reveals unexpected high-profile departures and a last-minute recruitment response.There is less evidence of long-term contingency planning.
Governance Across Borders
Concerns around issues of succession are increasingly on the agenda of businesses around the globe - from South America, to South Africa.
In South Africa, where corporate governance is modelled on the original King report on corporate governance, the country is now on King III. It requires shorter tenure of board directors with a view to maintaining their independence – clearly one for all businesses and their Nominations Committees to consider.
In the United States, a recent investigation by professional services firm PwC into investor attitudes signalled dissatisfaction in a series of tasks related to Nominations Committees. Not only was improvement deemed necessary in succession planning and talent management, but also in executive performance metrics and compensation. Another PwC report looked at director and investor attitudes on board governance. It found that although there was unity around putting succession planning at the top of the agenda (alongside strategic planning and risk management), there were differences in viewpoints at a deeper level.
For example, 94% of investors surveyed by PwC saw obstacles to replacing underperforming directors, but only 53% of directors agreed. So there is also considerable room for improvement in communication and engagement between boardrooms and institutional investors.
Burberry plc in the UK stands out as an example of a FTSE 100 business with a seemingly wide-ranging, consultative and proactive Nominations Committee. But there are far younger organizations which have undergone rapid growth and globalization that have been struggling, from Yahoo and American Apparel, to Tesla.
Having founder-CEOs in a business can be particularly problematic. Noam Wasserman, author of The Founder’s Dilemma, revealed that four out of five entrepreneurs are forced to step down from the CEO post. It is a revelation that will not have been lost on many Nominations Committees - and their recruiting agents.
Echoing Wasserman’s research, the Amrop/IMD study found lingering historic power issues related to ownership, and in one or two cases the need for a younger board was a sensitive topic.
Board succession is also a complex issue for mid-caps. Deciding between family or non-family members, internal or external talent, can present dilemmas. Internal talent - often the obvious choice for succession - may run out of steam within the organization, which may then lack the capacity or vision to take it into uncharted territory. The unpredictability of the fast-changing mid-cap environment can also lead to defections of the best-equipped high potential talent.
But mid-caps are finding ways to compensate for pitfalls in Board recruitment that is internally focused. Independent board members are playing a vital role in challenging home grown assumptions, and in widening perspectives beyond traditional horizons.
As Nominations Committees move center stage and succession planning faces calls to become more robust, strategic and wide-ranging, how can businesses move forward? Constant changes in regulation, technology and markets, (especially in phases of rapid growth and globalization) mean it is not always obvious where and when to begin the search for talent. Succession planning is complicated by the need to keep Boards lean.
Given these challenges, one critical area of expertise is clearly needed – strategic human capital development. Businesses of all sizes can only gain from increased rigour and transparency in their processes, a more open dialogue regarding their human capital management, and integrated and forward-looking thinking. Yet such expertise is clearly missing from many a boardroom table.
A Clear and Present Opportunity
We argue that corporations should design and deploy their Nominations Committees as strategic, human capital think-tanks, rather than as seeing them as mere guardians of compensation and CEO nomination.
Nominations Committees hold the potential to be a highly-effective interface between needs assessment, and action – resulting in the appointment necessary to achieve a goal. This interface needs to take into account several perspectives, from the demands of investors, to the human capital function at its highest strategic level, within the framework of a changing governance code. In turn, the human capital function should be wired into two critical dimensions – the organization’s talent circuit board and also, its corporate strategy.
As yet any such interface remains fragmented. Furthermore, it is not enough for a Nominations Committee to simply be connected to the Human Capital Function - one or more of Committee members needs to have first hand experience in the area.
Even then, installing and composing the interface is only the beginning of the story. Human capital and related experts must learn how to deliver compelling counsel to board members who may not be used to receiving it. This means that onboarding and coaching for new Board members is critical.
Sources and Further Reading
Investor perspectives: How investors are shaping boards today… and into the future, PWC, 2014
What matters in the boardroom? Director and investor views on trends shaping governance and the board of the future, PWC, 2014
The Founder’s Dilemma, Noam Wasserman, Harvard Business Review, February 2008
Dina Medland, Fredy Hausammann and Steffi Gande