The Nomination Committee is No Longer Inferior to the Audit Committee

The Nomination Committee is No Longer Inferior to the Audit Committee
One of the most important tasks of a Supervisory Board is to ensure that the company is managed correctly, now and in the future. The nomination committee (Nomco), which arranges the succession of the CEO, plays a special role here. A challenge, say experienced Nomco chairpersons Heleen Kersten and Jan van der Zouw, but: ‘Collaborating with a search agency ensures that sufficient consideration is given to strategy and diversity.’

The departure of the CEO is something Supervisory Board members prefer not to think about. Yet that is exactly what the Supervisory Board and even more so the Nomination Committee prepare for. By compiling a shortlist of possible successors, but also by overseeing the development of talent just below the Executive Board who are in preparation for a top position. The role of the Nomco is becoming increasingly important in the rapidly changing economic landscape. From research into the role of the Nomco conducted by Search and Leadership consultancy Spencer Stuart together with the International Center for Financial Law & Governance of Erasmus University Rotterdam, it appeared that this role is changing rapidly in many companies. Many of these committees are working on professionalizing the succession process of directors and Supervisory Board members.

Executives also need more insight into the pipeline from the rest of the organization towards the Executive Board. Suzanne van der Erve and Rob Miesen lead Spencer Stuart’s board practice and asked experienced Nomco chairpersons Heleen Kersten and Jan van der Zouw about their experiences and best practices. Kersten is a corporate lawyer and partner at Stibbe, a member of the Supervisory Board of publishing group Wolters Kluwer and she just completed her last term as member of the Supervisory Board and Nomco-chairman at STMicroelectronics. She was, in addition, until recently vice-chairman of the Supervisory Board of the Rijksmuseum and she is chairman of the Dutch Red Cross. Jan van der Zouw was CEO at Eriks for many years and is now chairman of the Remuneration and Nomination committee of Aalberts. He is also a supervisory director at Masterflex and chairman of the Supervisory Board at HGG and Den Helder Airport.

The role of the Nomination Committee within the Supervisory Board has become increasingly important in recent years. Where do you see the most important changes?
Van der Zouw: ‘In the past, the focus of the Supervisory Board was mainly on the Audit Committee, the Nomco had much less urgency. Wrongly, but the company only noticed this when a succession problem arose. That has changed, the Nomco is no longer inferior to the Audit Committee. Although there often still is a difference in the remuneration. The working method of the committee has changed considerably. In the past, the standard lists were put on the table when the end of the CEO’s term loomed and it was mutually determined who would be called from the list of potential successors. No search consultancy was involved, which is now unthinkable.’
Kersten: ‘This sounds familiar. With my first supervisory directorships and additional activities, I was called by someone from the company who knew me. There was no process with other candidates and certainly no profile for the position. Fortunately, that has now changed. With my Supervisory Directorship at STMicroelectronics nine years ago, the start was very structured. I carried through this approach in the Nomco. A profile is drawn up based on the company’s strategy and we always work together with a search agency. This way you can be sure that you give sufficient consideration to strategy and diversity in the process.’

Succession issues are an important task of the Supervisory Board. As chairman of the Nomco, you have both been closely involved in the succession of the CEO. What insights did that yield?
Van der Zouw: ‘As chairman of the NSR, the Nomination, Selection and Remuneration Committee of the supervisory board of Aalberts, I had to deal with the rather sudden departure of the CEO last year. Wim Pelsma announced that he was going to do something else and wanted to hand over his duties within twelve months. Succession is always an important theme, which is on the agenda two to three times a year. You talk to the CEO about succession, but also to the Board of Directors and – in less detail – the management layer below. So there was a plan and a list of potential internal successors, but twelve months is a short period. We quickly went through the internal candidate list and started compiling a profile together with the search agency.’
Kersten: ‘We had a more extended period to prepare for the succession of CEO Carlo Bozotti at STMicroelectronics. We started preparations more than a year and a half before his retirement date. Such as drawing up the profile sketch in consultation with a search agency. We then looked at the candidates for succession, both internally and externally, with the entire Supervisory Board. In the end, the Supervisory Board opted for an internal candidate, Jean-Marc Chery. You build on the ongoing consultation in the Nomco about the succession. At STMicroelectronics, the CEO was never present at these committee meetings, unless there was a specific topic that we invited him to.’

Supervisory Board members and Executives sometimes find it difficult to discuss the succession of the CEO. Many Nomcos now choose to put the topic on the agenda at least once a year, as a continuous process that is separate from any individuals. What do you think of that?
Kersten: ‘At STMicroelectronics, we discussed the succession planning of the Board and the Supervisory Board at least once a year. You need to know whether you still have the people in house to cope with the loss of the CEO.’
Van der Zouw: ‘We also do that at Aalberts, but they are still merely paper exercises. I compare it to participating in the RTL Z stock market game with fake money. You can lose the game, but it is not real. If you really have a problem, you often make different choices based on the situation at that moment.’

A well-functioning Nomco proves its worth by preparing the succession in good time. At the same time, an ‘under the bus scenario’ may also occur, in which the CEO must be replaced in a short period of time. How can the Nomco prepare for this?
Kersten: ‘The most important thing is that you discuss whether there will be a problem if the CEO leaves. Can you accommodate that internally at least for the time being? STMicroelectronics has a large Executive Committee with people who can temporarily deputize. That gives you time to search for a successor together with a search agency.’
Van der Zouw: ‘Preparation is important, but I know from experience that the circumstances play a major role. The former Grontmij (a consultancy and engineering firm that has since been taken over by the Swedish Sweco, ed.) went through a difficult period in 2011. At one point a major shareholder proposed a change of the top. In a short period of time, part of the Executive Board was replaced and two Supervisory Board members stepped down. Under those circumstances, a list turned out not to be sufficient and a search was necessary.’

An important part of succession is talent management. Nevertheless, gaining insight into internal talents at the management levels below the board of directors proves to be a challenge. How do you handle that?
Van der Zouw: ‘We are actively identifying whether there are sufficient potential successors internally who are in various phases of development. This results in a list with a diverse group. Culture bearers with twenty years of experience in the company. People who know the company through and through, within their own discipline and responsibilities, but also internationally in other activities within the same group or company. In addition, there is a group of younger talents, often highly educated people with a boyish approach. Some have not yet fallen and got up again sufficiently in life to be able to take on that CEO position at that specific time.’
Kersten: ‘In my various supervisory directorships, the talent in the pipeline for the future succession of the CEO, but also the CFO, has been and is being looked at very closely. You need to do your homework so you know these people. That, incidentally, also applies to the entire Supervisory Board.’

What role does HR or the CHRO play in this process?
Kersten: ‘The CHRO can help with compiling the internal list of talent. HR must map out who is in the pipeline, and what those people can and want. I do not involve them in the succession decision-making itself. In my opinion you have to be careful with that, after all, the new CEO will officially be the boss of HR.’

Some companies use assessments to estimate whether someone is capable of taking the step towards leading the organization. What are your experiences?
Kersten: ‘Such a talent review can certainly be useful. For example, for the management top 50 in the company. It is not something you should do too often; it can also create an atmosphere of unrest.’
Van der Zouw: ‘We are very careful with it. If an internal candidate has a bad day, this results in a negative assessment. The company gets it back like a boomerang, sometimes you even see talent leave. Personally, I prefer to visit the business units and see the potentials at work within their own team and environment. Then you hear what they are doing, you listen to the strategic plans and you see how they treat their people. Moreover, as a Supervisory Board member you get to know those business units well.’
Kersten: ‘We also do such visits at STMicroelectronics and Wolters Kluwer, and they are very valuable. The interaction with the other members of the team shows what people can do. You speak to the whole team and not just those who are part of the Exco.’

As Nomco chairperson, do you also have sufficient insight into talent outside the company?
Van der Zouw: ‘Not enough. There are few similar companies in the Netherlands. Aalberts works in the manufacturing industry, so you soon have to look across borders. In order to have sufficient choice, we therefore ask a search agency to help make a longlist. They know people who fit in with the corporate culture, who may not yet have been on our radar.’
Kersten: ‘We always call in a search agency. For example, to discuss the profile sketch. They provide refreshing ideas and names of candidates that you would not have thought of yourself. It is my experience that it also contributes to the meticulousness of the process.’

Diversity is an important theme when considering the composition of the top. The new Dutch corporate governance code is expected to contain stricter provisions in the field of diversity and inclusion. But we see that in the majority of Dutch listed companies the Nomco chairperson is a man.
Kersten: ‘I really think this is a point of attention, because this committee is about succession. Although the fact that the chairperson is a man not necessarily says anything about the composition of the committee. Still, it is good to think about the composition. As a man you can think that you have a keen eye on gender diversity, but that might not really be the case.’
Van der Zouw: ‘I can only agree with you on that. The NSR of Aalberts consists of three elderly European gentlemen and meets the image that is being drawn.’
Kersten: ‘At Wolters Kluwer, the chairperson of the Supervisory Board is a woman, and she is also the chairperson of the Nomco. And at STMicroelectronics, I was president of the Nomco for nine years. Maybe that is why I did not know that those committees are generally not diverse at all. As a company, you want diverse talent to feel that the company suits them. And then of course it is not only about gender, but also about cultural diversity. Here the search companies also present opportunities, as they bring to the table names of candidates with different backgrounds.’

To achieve diversity, the male-to-female ratio is a spearhead for us when proposing candidates. We notice that the Supervisory Board sometimes unknowingly undo that diversity by compiling a shortlist of men only. We enter into that conversation and it is received positively.
Kersten: ‘In that context, it is good to see that the new corporate governance code goes a step further. Diversity is more widely addressed in the appointment, succession and evaluation of directors and Supervisory Board members. So far, the code has included that you must take the diversity and inclusion policy (D&I) into account. The proposed changes state that this must be ‘in line with D&I policy’. That D&I policy is also broader than the law and focuses on much more than just gender. Improvements that companies will have to take to heart, also on the Board.’

Economic and geopolitical shifts require CEOs to perform in a rapidly changing landscape. This requires an evaluation by the Supervisory Board and the Nomination Committee. After all, changing circumstances may call for a different kind of leadership. How do you shape this as Nomco?
Kersten: ‘That is not the case at the companies where I am, or until recently was, a Supervisory Board member. Naturally, when you are in the middle of a succession, you consider what kind of leadership the company needs. This almost always produces a different profile than that of the person who is saying goodbye. I see a shift towards companies opting for a smaller statutory board with a relatively large Executive Committee underneath. This offers far more flexibility. Based on developments in the market, it is then easier to choose a different person or perhaps a different portfolio In the Exco.’
Van der Zouw: ‘There is always pressure from your surroundings. I think when extreme circumstances arise you make the best decisions with the people you have. This is very different from private equity, where a change of directors is often the chosen solution if the results are disappointing. With normal listed companies that meet analysts’ and the market’s expectations, I do not see this happen very swiftly. Moreover, change is constant. The CEO must be able to deal with that. If that is not the case, you can only blame yourself as Supervisory Board. Then you made the wrong choice when he or she was appointed.’

This article was published in Management Scope 07 2023.

This article was last changed on 29-08-2023