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The nominating committee: architect of corporate governance
As the corporate governance landscape evolves, so too must the role of the board and its committees.
Each board committee has its role. Unlike the other committees which are primarily focused on management and the business, the focus of the nominating committee (NC) is, in fact, the board. It recommends director candidates, and sometimes even C-level executives. It takes care of board evaluation and evaluates the independence and time commitment of directors. It oversees governance practices to ensure an effective board.
In other words, the NC is the architect of the organisation’s corporate governance framework.
Failures on the part of the board committees can be traced in part to the work of the NC. For example, when corporate scandals occur, the audit and risk committee tends to come under the spotlight. Many issues however can be traced to organisational culture, and the board sets the tone for this. The behaviour and actions of the board are driven by the people who comprise it. And they are screened and recommended by the NC.
A basic requirement of the NC is to ensure that the board adheres to the rules – and more importantly, the spirit of the rules – of good governance as enunciated in the Code of Corporate Governance. Some of the recent amendments to the Listing Rules and the Code, such as the strengthening of the nine-year rule for director independence, place an even heavier burden on the role of the NC.
The 2019 Singapore Board of Directors Survey by the Singapore Institute of Directors found that 43 per cent of the 127 boards that responded still had independent directors who have served more than nine years. The revised nine-year rule will come into full effect on 1 January 2022. Hopefully, by then, most boards would have responded not only to mandatory requirements of the Listing Rules, but also to the spirit of the Code.
That said, boards and NCs need to transition from a compliance-driven mindset to one that is more proactive in supporting strategy-setting, as well as driving performance and transformation. The role of the NC is now expanding to include new major responsibilities such as board culture and organisational reputation.
Boards today look to the NC in considering whether a fundamental rethink of the board construct is in order, given the increasing prominence of issues like environmental, social and governance (ESG) factors that do not neatly fit within today’s typical board committees and their terms of reference.
Organising the board such that it is fit for purpose requires the NC to weigh in on the possibility of establishing new committees, or whether it makes more sense to expand the scope of its current committees. For example, some boards opt to give the board risk committee the mandate to oversee ESG in its entirety, while others distribute and assign responsibilities across the existing structure.
Catalyst for change
The silver lining is that all this ambiguity may prod the NC to evaluate board effectiveness against the business landscape of tomorrow. For a board to effectively complement management in developing and shaping strategy, it is imperative that it is composed of directors who have the requisite breadth of experience, and who are collectively able to bring their respective domain knowledge and expertise to bear.
There is a great deal of emphasis on culture and teamwork in high-performance boards, and this is achieved through careful succession planning on part of the NC. Not only are candidates’ skillsets examined, personal values and group dynamics are also considered, often through psychometric assessments.
The NC should also look to recalibrate itself. Culture is starting to find a place in the NC’s agenda and rightfully so, given its role in building the board as well as searching for the CEO. With this expanded mandate, perhaps the responsibilities of the NC should also include the oversight of corporate culture and ethics across the entire organisation, not just at the top.
In practice, this would mean setting clear expectations concerning the organisation’s culture, values and behaviours, as well as holding senior management to the highest standards of probity and ethical leadership.
From custodian to strategist
In essence, the NC needs to shift its operating model away from just being the “human resource department of the board”. It needs to be more strategic and visionary, moving from custodian to strategist.
In time to come, all these may even precipitate a change in the name of the nominating committee as its role evolves, such as the “nomination and governance committee”, as it is known in some boards today.
The bottom line is for the NC to up its game and drive meaningful changes in the way corporate governance is effected. The need for businesses to transform and be future-ready has been repeated ad nauseum. Boards should recognise that this also applies to them, and while many NCs in Singapore today are rising to close the gap, there is still some way to go.
The writer is a member of the working committee of the Board and Audit Committee Guides in the Corporate Governance Guides for Boards in Singapore published by the Singapore Institute of Directors.