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Serving on and chairing the nominating/governance committee

  • May 28, 2024

The committee's service may have higher expectations than ever before

One of the nominating/governance committee’s primary roles has always been to identify and recruit a highly qualified group of people with the right mix of skills to serve on the board. It still is. But the EU’s Corporate Sustainability Reporting Directive, California’s new climate disclosure rules, and several new or pending SEC rules have made governance structure and process a much more explicit disclosure requirement than in the past. Companies are also facing higher investor expectations on governance, with board composition among their top concerns.

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Nominating/governance committee chairs view board composition as their committee’s top priority

Source: Spencer Stuart, Nominating/Governance Chair Survey 2023, July 2023.

Who is on the nominating/governance committee and how it works

The board chair may set the tone once the board is set, but establishing and facilitating an effective board begins with who is in the room — the domain of the nominating/governance committee.

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What’s high on the committee’s ongoing agenda?

The nominating/governance committee is charged with assessing and enhancing overall board effectiveness. The committee guides the board’s evolving approach to its work and the information flow to and from the board. There are various tools that the nominating/governance committee can use to assess and enhance board effectiveness. They include but are not limited to peer benchmarking, board and committee self-assessments, and individual director assessments.

Some committees, including nominating/governance, are legally required to be in place; others are optional, to help the board more effectively carry out its oversight functions. The nominating/governance committee is responsible for regularly assessing the board’s committee structure and allocation of responsibilities and recommending adjustments when appropriate to maintain alignment with the company’s long-term strategy.

Research and experience have confirmed that diverse groups of decision-makers outperform those in which everyone looks and thinks alike. The nominating/governance committee should keep this in mind when considering the board’s overall makeup. An independent, diverse board with varied perspectives and experience suited to the company’s circumstances will likely make better decisions.

Indeed, many investors have adopted and regularly review proxy voting policies expressly supporting board diversity. Those investor policies often speak to gender and minority representation, but some go beyond those criteria to urge diversity of perspectives and personal characteristics such as race, age and ethnicity. The nominating/governance committee should aim to stay abreast of investors’ evolving views on board diversity.

The board is a dynamic body: a collective of skills, experience and perspectives that must continuously adapt to the changing business environment and the company’s strategy, goals and needs. The nominating/governance committee determines the appropriate board size and continually refines the board’s composition to align with the company’s evolving strategy as well as reflect the broader business environment and key stakeholders.

The nominating/governance committee oversees board refreshment as part of assessing not only the board composition but the specific structural mechanisms underpinning composition, including annual director elections, voting guidelines in which directors who fall short of a majority shareholder vote must offer to resign, term limits and age limits.

The committee should also be opportunistic in its recruitment efforts. If the committee identifies an ideal candidate, the committee can always recommend that the board temporarily increase the size of the board to bring on that candidate — and reduce the size of the board once it is time for another director to step down.

A solid director onboarding program can help new directors make contributions faster. New directors need to learn about the company and the board’s ways of working, since no two companies and no two boards are the same. The committee provides input into that structure and who should take part in the new director’s onboarding.

No matter whether directors are recent arrivals or veterans, they need education and upskilling to keep pace with technologies and external developments affecting company strategy and business operations. The nominating/governance committee typically oversees director training and education, whether aimed at filling individual knowledge gaps or educating the full board.

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How are the more traditional nominating/governance committee responsibilities being remade?

In addition to the big and ongoing agenda topics discussed above, the nominating/governance committee continues to hold responsibility for certain longstanding, and sometimes administrative, governance and disclosure requirements. However, even these responsibilities continue to evolve due to shifting pressure from investors, regulators and the overall business environment.

The nominating/ governance committee should regularly review and recommend to the board, and as required, to shareholders, any changes to the provisions governing shareholder rights.

The committee should review the code annually to make sure it reflects evolving legal requirements, sets a high bar for director behavior, and aligns with guidelines for executives and employees.

The nominating/governance committee oversees these guidelines, which serve as a “how and why” roadmap to a company’s governance principles and practices.

Public companies must disclose their board leadership structure, whether the CEO and chair roles are combined, and whether the company has a lead independent director and, if so, the responsibilities of that role.

Independence is not always easy to assess, but it falls to the nominating/governance committee to make recommendations to the board about each individual director’s independence.

The nominating/governance committee is often charged with recommending to the board what protections the company should provide to directors and officers for potential losses arising from lawsuits.

The nominating/governance committee plays a significant role in annual meeting planning and assessing shareholder voting results.

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Telling a story of good governance — and building trust with stakeholders

Board communication with stakeholders is central to the nominating/governance committee’s role in enhancing board effectiveness. The committee should evaluate the information flow to and from the board, since necessary information changes along with the issues that the board addresses.

The committee can take the lead in building trust with the full range of stakeholders through communication about the company’s corporate governance, clearly explaining the board’s membership and governance practices in the company’s proxy statement as well as on the website. Often this involves offering enhanced disclosure, including information sought by investors and other stakeholders, but the larger goal is to tell the company’s governance story, specifying why current governance practices are appropriate for the company and its stakeholders, and align with a deeply-held commitment to good governance.

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Conclusion

With the business, legal and regulatory environments constantly shifting, and stakeholder expectations forever rising, stable corporate governance is more important than ever. The nominating/governance committee is central to board effectiveness, with the committee not only performing legally-required functions but helping the board build trust among the company’s varied stakeholders. Facing a myriad of changes and challenges, the nominating/governance committee strives to address current needs and prepare the board and company for the future.

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