The Ways of the NomCo are Inscrutable
When professor of financial law and governance Hélène Vletter-Van Dort was a commissioner at British Barclays Bank several years ago, she experienced how structured the Supervisory Board was in scouting and developing high potentials within the company. Supervisory Board members took great care in succession planning and conducted interviews with candidates one or two layers below the Board. Vletter-Van Dort regularly suggested this way of working in the Dutch business community, but the response was mixed. In her experience, many SBs miss opportunities in succession planning.
Rob Miesen, a consultant with search and leadership consultancy Spencer Stuart, also notes that even large, publicly traded companies often do not consider the scenario where the CEO is unexpectedly ’run over by a bus’. 'They do not always have a clear picture of an internal candidate who could fill the role or whether suitable or more suitable candidates are available outside the company.'
The findings prompted an investigation into the roles and responsibilities of the nomination committee (NOMCO). The International Center for Financial Law & Governance (research institute at Erasmus School of Law) and Spencer Stuart conducted the research. The results were presented last year. Since then, according to Vletter-Van Dort, the subject is increasingly receiving attention. We saw this as reason enough to present the conclusions to some experienced Supervisory Board members of mainly listed companies, some of whom also occupy the chair position.
The neglected child
A key finding of the study is that the NomCo's job description is anything but clear. While the corporate governance code clearly defines what is expected of the remuneration and audit committees, there is little focus on the role of the NomCo. It is a neglected child. In practice too, companies deal differently with the NomCo, according to the research for which a large number of Supervisory Board members were interviewed and questioned. Vletter-Van Dort: "A number of Supervisory Boards take the NomCo very seriously; there is a good agenda, attention is paid to succession planning, talent development and the coaching of talented employees. But there are also SBs which do not have a good radar on what talents the organization has in-house as potential successors.'
This causes frustration among Supervisory Board members, according to Vletter-Van Dort, but, more importantly, is risky. 'For these companies, it is difficult to find a good successor internally when the current CEO or CFO announces his or her departure. They have absolutely no idea which colleague has the talent to take over as CEO or CFO in five years.' In addition, the study makes clear that almost all Supervisory Board members - including those who are part of a well-functioning NomCo - struggle with identifying and guiding high potentials. 'In this respect, Supervisory Boards could work more closely with the Board,' says Vletter-Van Dort.
One-two punch with the CEO
In addition, a sensitive issue is that at most AEX companies, the Supervisory Board Chairman is also Chairman of the NomCo. Many Supervisory Board members believe that this role should be split, according to the survey. Vletter-Van Dort: 'Succession should not be a one-two punch between the CEO and the Chairman of the Supervisory Board.'
Other Supervisory Board members, according to the study, have no problem with the Supervisory Board Chairman also being Chairman of the NomCo. 'Their argument is that succession and succession planning is simply one of the most important tasks of the Supervisory Board. They find it logical that the Chairman of the Supervisory Board is also Chairman of the NomCo.'
Conservative ideas about diversity
Another striking conclusion: according to Supervisory Board members, the NomCo fulfills an important role in promoting diversity, equity and inclusion, or DE&I. At the same time, their ideas about diversity are still somewhat conservative, Vletter-Van Dort observes. 'Most executives do not look beyond a balanced ratio of men and women. Also, many Supervisory Board members do not really know how to improve inclusion within the organization.'
Rob Miesen adds that based on what large companies say about diversity, you might expect that the top of the organization is also diversely composed, and thus so is the NomCo. 'But that is not the case. For the top-50 AEX companies, the Chairman of the NomCo is male 83 percent of the time. That is anything but a good starting point to promote diversity.'
Vletter-Van Dort suggests that the Chairman of the NomCo should also be appointed Chairman of the remuneration committee. These two committees could even be merged, according to the professor. 'After all, you cannot properly decide on an appointment without discussing remuneration. Especially now that executives’ performance is increasingly linked to ESG objectives.' Merging helps eliminate the discussion about the dual Chair roles of Supervisory Board and NomCo. Indeed, according to the corporate governance code, the Chairman of the remuneration committee may not be Chairman of the Supervisory Board.
Vletter-Van Dort mentions another advantage that would result from merging. 'Because there are requirements for the composition of the remuneration committee, the NomCo will automatically also become more diverse. After all, the NomCo must reflect what you want the organization to look like in future. If the committees are merged, however, a practical solution must be found for the length of the agenda.'
Good habits and the obvious
A number of Supervisory Board members attending the master class do not consider it necessary to draw up rules for the NomCo. 'It makes sense that the supervisory role of the audit committee is tightly regulated in the code to prevent accounting scandals and society being harmed by them,' says one of them. 'For the NomCo that does not apply - if a listed company is so stupid that it does not have the succession in order, only the company breaks down.' Another states, 'A good Chairman knows perfectly well how to approach the succession of a CEO. The preparatory work lies with the NomCo, with the Chairmen of the various committees. If it concerns a CFO, then logically the Chairman of the audit committee sits there. That is good practice; you do not need to have a Soldier's Manual for everything.'
When it comes to succession planning, a fellow Supervisory Board member outlines that the Board is primarily responsible for talent development within the organization and spotting potential future executives. ‘In doing so, it is natural for the Executive Board to notify its Supervisory Board members if talented people are present at a certain management level. These practices do not necessarily need to be codified.’
Not rules, but handles
Supervisory Board members do however need guidelines. One Supervisory Board member experiences that the CEO often has disproportionate influence on who joins the Supervisory Board, who becomes the Chairman and vice Chairman, but also who joins the Executive Board. 'There is never any discussion about who, or who should,, have a say in this process. Usually, it happens the way it always has. But is it a best practice? Without formulating strict guidelines, the code could state that the board discusses the procedures around succession with each other after a certain amount of time. If it is not on the agenda, the conversation never happens.' This suggestion would most probably be met with approval.
One of the Supervisory Board members has a wish. 'I would like to hear from the NomCo which candidates dropped out early. They don't share that with me - I would want to participate in the process. This annoys me. I will be held accountable for that appointment.' A fellow Supervisory Board member: 'It would be regrettable if there is white smoke from the chimney and the Supervisory Board members are only allowed to approve. The NomCo should keep the Supervisory Board involved.' According to another participant, Supervisory Board members should always be able to see the minutes. 'But how and whether you should lay down such a rule, I have no idea.'
Still a multitude of white men
A number of presiding Supervisory Board members called it perfectly logical for a Chairman of the Supervisory Board to also be Chairman of the NomCo. 'As Supervisory Board Chairman, in addition to the company's strategy, I feel fully responsible for the succession of Board members. I'm not going to hand that over to a Chairman of a committee.' A colleague says, 'If the Chairman-of the Supervisory Board has a one-two punch with the CEO in the process, that's unacceptable.' This Chairman calls it striking that the Netherlands lags behind in diversity and inclusion. 'In America, women have been well-represented at the top of the corporate world since the 1990s, as have people of African-American descent. In the Netherlands, the NomCo still often consists of white men. I think at least one woman should be on that committee.'
An improvement plan for the NomCo
Sometimes it is difficult for a Supervisory Board to evaluate its own performance or that of the executive Board, as the study on the responsibilities and tasks of the NomCo shows. The amended code therefore recommends that an evaluation be conducted every three years by an external party. A substandard score is grounds for rigorous debate.
Vletter-Van Dort has some advice for Supervisory Board members and Directors about this evaluation: ’Regardless of how you evaluate each other: discuss possible improvements honestly and respectfully. In doing so, also explicitly evaluate the NomCo. This will eventually bring frustrations about the NomCo to the table. Then draw up an improvement plan of a few bullet points. It is up to the Chairman of the Supervisory Board to observe these agreements in a disciplined manner.’
This article was published in Management Scope 03 2023.