Corporate governance has seen a new challenge in the last year with the pandemic. Yet, scandals afflicting boardrooms, risks related to cyber security, or shareholder activism have not abandoned the corridors of corporate power.
The current changes in performance parameters and calls for better governance have forced governance committees to ask hard questions about the effectiveness of board of directors. Many of the traditional responsibilities of nominating committees are in reality managed by the full board, the chairperson or other directors.
These committees are supposed to provide major support to the full board, and members typically provide the guidelines on trends in the governance area. Comparing governance against best practices and the competition is a key part of their mandate.
Quarterly meetings are the norm for most board committees, but no one stops them from meeting more often. Typically, the CEO should be part of the governance committee and it produces regular reports for all the board of directors.
Need to cope
How have board nominating/governance committees adapted to world events of the past year-and-a-half? We have worked closely with governance committees both in director searches and in helping them cope with new demands. Here are some observations on how such committees are coping.
In inducting new directors, many boards have found it difficult to get them integrated with existing members. Although the new members were added to the board, most have not get a chance to meet others in person. Some boards are deciding to come back to in-person meetings much earlier than planned because they miss the social aspect of discussing and mingling.
Remember that in-person board sessions allow lots of informal interaction. One way to resolve the handicap of virtual meetings is to respond to continued virtual governance by structuring added online chats, virtual board “lunches”, and round-robin discussions by board and committee chairs.
In the US, the focus of board diversity really shifted in mid-2020 from gender to race and ethnicity. The ISS policy of voting against nominating committee chairs with unrepresentative boards makes this even more important.
A sameness to it all
Committees are now looking for more diversity, and are willing to open their search aperture more. We have seen a study that found that 75 per cent of white board members have no non-white contacts in their social networks.
That means boards are turning more to search firms to help since they have much wider network. A recent NACD research found that over 50 per cent of corporate boards now seek executive search firms for finding prospective board members.
What kinds of candidates are the boards searching now? The most established trend is demand for business leaders who have successfully navigated digital transformation. The pandemic accelerated that need.
Boards want digital talent who can guide and oversee managers on this. This trend is unlikely to ebb in the medium term – we find the biggest success comes when the board has three digital experts onboard. Possible pointers for the GCC boards, we guess.
Another new trend is a move toward serious consideration for ESG (Environmental, Social, Governance)\. The question boards now face is whether they should educate the members on ESG concerns, or find new board leaders who have already integrated ESG.
We have a recommendation for those boards: Base such “make our own or go outside” decisions on your company’s specific environmental, social and governance profile and vulnerabilities. A chemical company, a food-service chain, and a multinational financial services firm will each face very different boardroom ESG demands.
For years, the audit committees were treated as the board’s junk drawer – a general catchall for duties that you needed to stash somewhere. As audit has pushed back on this overload, and as board talent and governance oversight expanded, nominating/governance is the new dumping ground.
They are now burdened with ESG and organizational culture – some things you could argue belong elsewhere on the board. Our recommendation is to have your board set aside time for a thorough governance review of committee charters.
With so much change of late, all committee roles have become blurred, uncertain and, often, overburdened.
