It is High Time to Professionalize the Nomination Committee
The roles and responsibilities of Supervisory Boards have evolved in recent years. This is especially true for matters that are gaining increasing importance, such as governance, succession planning, talent assessment, diversity and inclusion. The Nomination Committee (NomCo) should play a key role in these developments, but the question is whether this committee has kept pace with this evolution and is able to fulfil its potential role to an adequate degree.
To explore this question, the International Center for Financial Law & Governance at Erasmus University Rotterdam, in collaboration with search and leadership consultancy Spencer Stuart, conducted a study on the changing role of the NomCo. The main conclusion was that in the Dutch Corporate Governance Code and in the majority of large companies and listed companies, the NomCo is underrated. And this despite the fact that one of the most important tasks of a Supervisory Board is to ensure that the company is currently and will continue to be managed correctly in the future. In practice, there is still room for considerable professionalization in the succession process of Directors and Supervisory Board members and in gaining transparency in the pipeline towards the Executive Board. How can this be explained, and how can it be improved?
For the purposes of our research, we first looked at the Code itself. In it, only one out of 50 pages is allocated to the NomCo, and its duties and responsibilities are described in much less detail than those of the Audit and Remuneration Committees. This can be explained by past events. After all, the Code was partly created in response to social outrage over scandals that have happened. The role of the Audit Committee, for example, has been compressed due to numerous accounting scandals, while Remuneration Committees respond to discussions about directors’ salaries, which are considered exorbitant. Shareholders and perhaps employees may be concerned when a CEO fails in doing their job, but society generally shrugs its shoulders.
That’s not how things should be at all. After all, scandals can only occur when the leadership fails and the right conversations are not being had in the boardroom. Most companies do realize that good leadership is important, yet they don't focus on it enough.
A minimalist interpretation
Precisely because nominations touch on so many aspects of the business – human resources, strategy, remuneration structure – the NomCo should, in our view, perhaps be the most important committee of the entire Supervisory Board. However, the Code gives the Supervisory Board members a lot of flexibility to interpret the role of this Committee as they see fit. In order to find out how this happens in practice, we analyzed the annual reports of 75 companies in the AEX, AMX and AScX, conducted an online survey and held in-depth interviews with Management Board members and Supervisory Board members.
The results clearly show that the role of the NomCo is still often interpreted in an abstract and minimalist way, which compromises its effectiveness. For example, the code lists 'evaluation' as a core task, but in practice there is a huge spectrum as to how extensively and carefully this takes place. Supervisory Boards find it difficult to scrutinize its own performance and that of Management Board members from a slight distance. The consultation document containing proposals for updates to the Code recommends that this evaluation takes place annually under guidance from an external expert – and for good reasons. It makes the process more neutral, objective and less ‘tense’.
A delicate discussion
Another tricky topic is succession planning. Quite a few Supervisory Board members and regulators find it difficult to discuss the succession of the CEO because it is said to be too delicate a subject. This is a widely-heard argument, particularly if someone has only recently been appointed. It is worrying, because for the continuity of the company you can expect the Supervisory Board to anticipate all eventualities, including the unexpected departure, illness or death of a CEO. In short, companies have to be prepared for many different potential scenarios.
The NomCo can facilitate this by placing evaluation and succession on the agenda at least once per year as part of an ongoing process that is separate from individuals. In addition, companies are undergoing transitions and the leadership needs to be continuously adapted in line with those transitions. There is a good reason why board members and Supervisory Board members are appointed for periods of four years. The idea is that you should continuously check whether someone still meets the requirements – in other words, whether they remain suitable to lead the company in the future. It is good practice for a Supervisory Board to have a transparent discussion with a management team about the company's strategy and the skills required now and in the future in order to execute that strategy. Companies that take a process-based approach to this objectify the dialogue. The discussion is not about someone's individual shelf life, but provides an opportunity for leaders to manage the future of their company in the right direction.
Talent management is a challenge
Our research shows that one of the major obstacles is gaining information about internal talent at management levels below the Board of Directors. Yet, this information is extremely important for the purposes of succession planning. According to our research, NomCos are not very successful in getting those highly talented individuals on the radar. Supervisory Board members need to regularly discuss which positions on the Executive Board and Executive Committee need to be filled now and in the future, which internal candidates could potentially fill these positions and how they can develop and be encouraged.
These talks require planning: If you only initiate them after a CEO has announced that they will be stepping down in a year's time, for example, then you are already too late. Incidentally, this does not mean that the NomCo itself needs to be on familiar terms with the entire top 50 of the company. A good start is to investigate whether there is a systematic process for identifying and developing talented individuals who could potentially fill the top positions. You need to do more than simply talk to Human Resources – instead, you need to actually count the number of internal and external appointments for top 10 positions. Understanding this is also important when it comes to retaining talented individuals and making the investment in them worthwhile. After all, if the top positions keep on going to outsiders, the top internal achievers are going to leave the company sooner.
Our research clearly shows that there are significant opportunities to improve the position of the NomCo. The Chair of the Supervisory Board often simultaneously acts as Chair of the NomCo as well. Sometimes, this person even arranges their own succession based on this dual role, arguing that it is important for the continuity of the important relationship between the CEO and the Chair of the Supervisory Board.
We also consider it important that the Chair of the Supervisory Board is involved in all appointment processes, and that is also perfectly possible as a member of the NomCo. We consider the concept of dual chairmanship inadvisable. In practice, we know that many Supervisory Board Chairs are strong personalities and, as Chair of the NomCo, will not limit themselves to a formal role as Process Manager. If they have a preference for a particular candidate, the other NomCo members will not readily object.
An even more important argument against the dual chairmanship role is its inhibiting effect on diversity and inclusion. The NomCo presents candidates for many different positions within the company, so you would at least expect the committee itself to have a diverse composition. Chairs of Supervisory Boards of large stock exchange funds are now almost exclusively men. Nowadays, allowing them to be Chair of the NomCo as well sends the wrong message: Experience shows that the chances of a woman being appointed are greater if a woman is responsible for succession. If more NomCo Chairs are women, more women will also be appointed as Chairs of Supervisory Boards and the entire company will ultimately become more diverse.
According to the current Code, the Chair of the Supervisory Board cannot be the Chair of the Audit or Remuneration Committee at the same time. The same should apply to the NomCo. Not including this at all in the consultation document for the more stringent Code is therefore a missed opportunity. We advocate abolishing this dual role in order to indirectly improve diversity and inclusion. After all, making companies future-proof starts with appointing the right people to the right positions and identifying who is to succeed them. The conversation about diversity and inclusion should form a natural part of that, as you are discussing the kind of company you want to be both now and in the future.
This essay was published in Management Scope 08 2022.