Sunday, 8 May 2011

The Nominations Committee

Nomination Committee

Contributed by Betty Thayer, Non-Executive Director Boyden UK Global Executive Search, the Appointments Commission and visiting lecturer at Cranfield School of Management’s Non-Executive Director Programme

1.0 Introduction

The Combined Code on Corporate Governance states:

“There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board.”

It also says:

“There should be a Nomination Committee which should lead the process for board appointments and make recommendations to the board.”

Ensuring that the board as a whole has an appropriate mix of skills and experience is essential for it to be an effective decision-making body. As with other aspects of corporate governance, the company must be seen to be doing so in a fair and thorough manner. It is important that a nomination committee be properly established with a clear set of terms of reference and authority.

The nomination committee is also included in the European Commission’s February 2005 Recommendation to reinforce the presence and role of non-executive directors on listed companies’ boards and their committees. The composition and role of the nomination committee detailed in the Recommendation to Member States is consistent with that contained in the new Combined Code.

This chapter covers:

• appointments to the board and the duties of the nomination committee;

• balance of the board;

• employing external advisers;

• widening the pool of non-executive directors; and

• nominating and appointing chairmen.

2.0 Appointments to the Board and the Nomination Committee

A rigorous, fair and open appointments process is essential to promote meritocracy in the boardroom and ensure shareholder interests are considered. Following the Higgs Review, the Principles and Provisions underpinning appointments to the board have been considerably strengthened in the new Combined Code. This is augmented by the following supporting principles:

• Appointments to the board should be made on merit and against objective criteria. Care should be taken to ensure that appointees have enough time available to devote to the job. This is particularly important in the case of chairmanships.

• The board should satisfy itself that plans are in place for orderly succession for appointments to the board and to senior management, so as to maintain an appropriate balance of skills and experience within the company and on the board.

The nomination committee has responsibility for board appointments and for making recommendations to the board. A majority of members of the nomination committee should be independent non-executive directors, although there is no guidance on the overall size of the committee.

The chairman or an independent non-executive director should chair the committee, but the chairman should not chair the nomination committee when it is dealing with the appointment of a successor to the chairmanship. The nomination committee should make available its terms of reference, explaining its role and the authority delegated to it by the board.

There are many excellent examples of terms of reference for the Nomination Committee. Several of these are cited in the Appendix.

The nomination committee should meet at least twice a year and certainly in anticipation of the year-end for any actions required at the Annual General Meeting. The chairman of the committee should attend the AGM to respond to any questions which may be raised on matters relevant to the committee.

The nomination committee should also evaluate the balance of skills, knowledge and experience on the board and, in the light of this evaluation, prepare a description of the role and capabilities required for a particular appointment. Anticipating changes in the board are also important, particularly for scheduled rotations or retirements.

The Higgs Review states in its Non-Code recommendations that the company secretary should act as secretary to the committee and it is his or her responsibility to ensure that the committee is properly constituted and advised.

For the key appointment of a chairman, the nomination committee should prepare a job specification, including an assessment of the time commitment expected, recognising the need for availability in the event of crises. A chairman’s other significant commitments should be disclosed to the board before appointment and included in the annual report. Changes to such commitments should be reported to the board as they arise, and included in the next annual report.

A separate section of the annual report should describe the work of the nomination committee, including the process it has used in relation to board appointments. For the appointment of a chairman or a non-executive director, an explanation should be given to demonstrate that an objective and open process was used which could include the use of an external search consultancy, open advertising, web-based services or other mechanisms.

Previous guidance has permitted smaller listed companies to allow the board to act as a nomination committee. This is no longer the case and Higgs recommended that “there should be no difference in the Code’s provision for larger and smaller companies”.

Appendix 1 to this article contains a summary of the principal duties of the nomination committee from the Higgs Report and attached to the new Combined Code.

An excellent detailed Terms of Reference for Nomination Committees has been documented in ICSA Guidance Note 031021.

3.0 Board Balance

The Principle on board balance, states:

“The board should include a balance of executive and non-executive directors (and in particular independent non-executive directors) such that no individual or small group of individuals can dominate the board’s decision taking.”

This has been developed in the new Combined Code by including a set of Supporting Principles as follows:

• The board should not be so large as to be unwieldy. The board should be of sufficient size that the balance of skills and experience is appropriate for the requirements of the business and that changes to the board’s composition can be managed without undue disruption.

• To ensure that power and information are not concentrated in one or two individuals, there should be a strong presence on the board of both executive and non-executive directors.

• The value of ensuring that committee membership is refreshed and that undue reliance is not placed on particular individuals should be taken into account in deciding chairmanship and membership of committees.

• No one other than the committee chairman and members is entitled to be present at a meeting of the nomination committee, but others may attend at the invitation of the committee.

4.0 Employing External Advisers

The vast majority of non-executive directors find their positions through people they know. In listed companies, it is inevitable that there are networks and cross-directorships which will encourage the appointment of people who are known to individual board members.

Since the Review was published in 2003, there have been significant changes to the ways in which listed companies find and appoint non-executives. The important point here is that if the company elects to pursue a process that is not structured, does not consider a wide range of applicants and is not based on a brief, it will almost certainly open itself up to unnecessary scrutiny in the annual report.

One option is to employ advisers in the recruitment process. Benefits of this approach include:

• it is a way to gain access to a wider field of available candidates;

• it is evidence, both internally and externally, that a thorough and professional process has been used in making the appointments;

• even if the nomination committee has strong candidates in mind, it is also constructive to look outside and make comparisons with others who might also be appropriate;

• the use of advisers helps to preserve confidentiality; they can establish availability and check on potential conflicts of interest before the company’s identity is revealed; and

• advisers help to sustain the momentum of the recruitment process; because it is inevitably time consuming.

The key disadvantages to this approach include the costs and the time which the process takes.

Other alternatives include advertising the role in appropriate national and trade publications; using a web-based service (such as to advertise the role; and publicising the role on networking sites such as LinkedIn. Various institutes now offer their members as possible non-executives, e.g. the Institute of Chartered Accountants in England and Wales, the Association of Chartered Certified Accountants and the Marketing Society. If a candidate with a particular background is sought, it is advisable to contact these organisations to advertise the role.

5.0 Widening the Pool of Non-Executive Directors

The composition of a board also sends important signals about the values of a company. A commitment to equal opportunities, which can be of motivational as well as reputational importance, is inevitably undermined if the board itself does not follow the same guiding principles.

Diversity amongst non-executive directors could spring from a number of as yet little tapped sources including: senior management just below board level, lawyers, accountants, consultants, private companies and the public sector. Also companies operating in international markets could benefit from having at least one international non-executive director with relevant skills and experience on their board.

Diversity does not have to mean gender or race. Many listed boards are made up entirely of current and former finance directors. Having a wide mix of functional talent is equally important.

For more information on this topic, see Chapter 3 of the Corporate Governance Handbook.

6.0 Nominating and Appointing Chairmen

An effective chairman is critical for fostering a constructive boardroom environment. However, current experience demonstrates some difficulty in finding able people for this demanding and important role.

It is essential to ensure that the process for appointing the chairman is robust and, therefore, it is worth re-emphasising four important principles fundamental to the process:

• the senior independent director, or deputy chairman if independent, should lead the process;

• a systematic approach should be taken to identify the skills and expertise required for the role and a job specification prepared;

• a short-list of good candidates should be considered, rather than possible individuals being considered in turn; and

• candidates with specific expertise in human capital should be considered. The CIPD runs a scheme for experienced HR professionals who are interested in non-executive, and particularly nomination committee, roles.

Appendix1 Summary of the Principal Duties of the Nomination Committee


The committee should:

• be responsible for identifying, and nominating for the approval of the board, candidates to fill board vacancies as and when they arise;

• before making an appointment, evaluate the balance of skills, knowledge and experience on the board and, in the light of this evaluation, prepare a description of the role and capabilities required for a particular appointment;

• review annually the time required from a non-executive director. Performance evaluation should be used to assess whether the non-executive director is spending enough time to fulfil his duties;

• consider candidates from a wide range of backgrounds and look beyond the “usual suspects”;

• give full consideration to succession planning in the course of its work, taking into account the challenges and opportunities facing the company and what skills and expertise are therefore needed on the board in the future;

• regularly review the structure, size and composition (including the skills, knowledge and experience) of the board and make recommendations to the board with regard to any changes;

• keep under review the leadership needs of the organisation, both executive and non-executive, with a view to ensuring the continued ability of the organisation to compete effectively in the market place;

• make a statement in the annual report about its activities; the process used for appointments and explain if external advice or open advertising has not been used; the membership of the committee, number of committee meetings and attendance over the course of the year;

• make available its terms of reference explaining clearly its role and the authority delegated to it by the board; and

• ensure that on appointment to the board, non-executive directors receive a formal letter of appointment setting out clearly what is expected of them in terms of time commitment, committee service and involvement outside board meetings.

The committee should make recommendation to the board:

• as regards plans for succession for both executive and non-executive directors;

• as regards the reappointment of any non-executive director at the conclusion of his specified term of office;

• concerning the re-election by shareholders of any director under the retirement by rotation provision in the company’s articles of association;

• concerning any matter relating to the continuation in office of any director at any time; and

• concerning the appointment of any director to executive or other office other than to the positions of chairman and chief executive, the recommendation for which would be considered at a meeting of the board.

Appendix 2 Sources

Terms of Reference for the Nomination Committee



Camelot Group

British Waterways Board


Guidance notes from the ICSA