The Rise And Rise Of The Nominating And Governance Committee

Nominating committees were once the home for directors that did not understand the business well enough to serve on either audit or comp. Today's nom-gov looks very different.

Today’s nominating committees are often at the very heart of the most pressing governance debates impacting a company, from oversight of ESG, to gender diversity and corporate culture, to driving CEO succession, meeting with shareholders, and offboarding spent directors.

That is far cry from old-style nominating committees that were often the home for showpiece directors that did not understand the business well enough to serve on either the audit or compensation committee. Those check-the-box committees met once or twice a year and followed a bland agenda of approving committee charters, with an occasional foray into a search for a new director. Perhaps they should have been more accurately called “nominal committees.”

The old-style approach reflected the lack of interest by outside governance authorities. For example, the NYSE’s Corporate Governance Standards provide a pretty narrow scope for nominating committees. The standards require director independence and that the committee identifies qualified directors, recommends applicable corporate governance guidelines, and oversees the evaluation of the board and management.[1]

The nominating committee is the last of the big three board committees to shift to a higher level of expectation and performance. The audit committee had to respond to the accounting scandals of the early 2000s and Sarbanes-Oxley. The compensation committee came under the spotlight after the financial crisis in the 2010s and Dodd-Frank. The nominating committee is evolving under the scrutiny of the largest institutional investors, think “Fink-Taraporevala”.

This shift in expectations led Russell Reynolds Associates to launch a NomCo Chair Network in 2019. The membership is comprised of S&P 500 nominating committee chairs. During discussions before the inaugural meeting one committee chair noted that investor pressure was shaping the committee’s role and agenda: “It is the actual investor commenting on the board’s practices, not a proxy advisory firm like ISS. That changes things.”

Other committee chairs have observed that expansion of the nominating committee’s mandate has led to an increase in the number of committee meetings from two to four a year, with additional telephone calls as needed.

So what are nominating committees spending their time on? There are a handful of tasks they have taken on, although the exact nature of the committee upgrade varies from company to company. Here are some examples:

• Board refreshment and evergreen search processes. Board recruitment continues to be the primary task of nominating committees but what the committee does has changed radically. The focus on board diversity requires a diligent, ongoing recruitment process in order to get top talent on the board. Our review of corporate governance trends for 2020 reported that investors would start taking a broader view of diversity to include racial and ethnic diversity: “Vanguard has announced it expects companies to publish their efforts to improve boardroom diversity and will begin asking about the race and ethnicity of directors. The NYC Comptroller’s Office (custodian of the $195 billion NYC Employees’ Retirement System) is asking companies to implement a modified version of the National Football League’s “Rooney Rule” and adopt policies to ensure women and people of color are on the initial list for every open board seat, as well as for CEO appointments.”[2] The need to refresh the board has also led many committees to conduct more robust and probing individual director assessments prior to re-nomination.

• Oversight of ESG matters. Topics like ESG and Corporate Social Responsibility are becoming a greater focus of the nominating committee agenda, changing the role of the committee to one responsible for broader risks faced by the company. One committee chair highlighted the adjacency of board oversight of corporate culture, “More is happening in the committee due to an increasing number of shareholder proposals and the need for greater outreach and engagement by the board.” The focus on ESG and corporate culture have moved the nominating committee deep into discussions that are increasingly central to business strategy.

• Succession planning. CEO succession planning is more often undertaken by the nominating committee. One chair told us, CEO succession planning is a big issue for nominating committees because chief executive tenure is shrinking, which means the committee must be prepared for emergency succession plans to be used.”

Given the radical shift of the nominating committee agenda over the last five years and the sense that the climate crisis may prove more value-destroying than Enron and Lehman Brothers combined, the nominating committee also needs to address its own composition. The new nominating committee is front-and-center on key issues facing the company and needs members to match.

The nominating committee chair will need to be a seasoned business leader, but one that understands and can respond effectively to the defining spirit of the age. That is not an easy combination to find but it will be essential to the work of the committee and the success of the board.

 

 

[1] NYSE Listed Company Manual Section 303A.04.

[2] https://www.russellreynolds.com/en/Insights/thought-leadership/Documents/2020-Global-and-Regional-Corporate-Governance-Trends.pdf

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Anthony Goodman is a member of executive search and leadership firm Russell Reynolds Associates’ Board & CEO Advisory Group. He has significant experience advising boards and stakeholders of major public, private and family-owned businesses on a wide variety of confidential matters.