Nominating & Governance Committee Priorities for 2023
Nominating & Governance Committee Priorities for 2023
Table of Contents
CEO and director succession and refreshment, governance policies and procedures, reporting and stakeholder engagement historically have defined responsibilities of the nomination and governance (N&G) committee. However, many such committees are seeing their expected roles expand to further encompass certain material environmental, social and governance (ESG) factors as these become more complex business issues.
Additionally, the role of the individual director continues to change and evolve. Directorship today requires more involvement, agility, dedication, accountability and engagement than in prior years. The Board, and each individual director serving on it, is being held accountable to a more broad-based community of stakeholders operating in a dynamic environment where priorities shift frequently.
CEO succession planning, a full Board responsibility and arguably one of the most significant activities of the Board, is often led by the N&G committee. As of July 2022, S&P 500 CEO annualized succession rates were 11.4% up from 10% in 2021. Retirement age CEOs departed at even higher rates: for S&P 500 31.5% and for Russell 3000 24.2% (both up from 2021 percentages). The rate of forced succession rates continues to be low in 2022 at just 2.3% for Russell 3000 and 0% for the S&P 500.
These numbers highlight the need for companies to be maintaining at-the-ready CEO succession plans – which don’t simply include a named new CEO but encompass the candidate pipeline identification process, any needed “grooming” of skills and experience that is strategically “future-focused” along with company-wide transitional and internal/external communication plans.
Governance Oversight Responsibilities and Documentation
Governance processes and policies drive successful governance and should be established, clearly documented and communicated, and revisited annually or more frequently if necessary. The N&G committee ensures that oversight responsibilities are captured within the appropriate charters. This requires alignment with succession planning and collaboration efforts with other committees and the full Board to ensure significant and emerging risks are allocated equitably and documented appropriately. For example, the N&G committee should consider the overall risk allocation among committees to determine if one or more committees are overburdened and whether there may be a need to recommend reallocation of responsibilities; and further may collaborate with the compensation committee to ensure committee retainers are commensurate with responsibility.
Eye on Emerging ESG Trends
Fifty-seven percent of directors in BDO’s 2022 Fall Board Pulse survey indicated that ESG matters are the responsibility of the N&G committee. However, the oversight of ESG matters may be thought of as an extension of the oversight of risk management. For that reason, many Boards choose to allocate material ESG risks among the committees of and within the management leadership team. There is currently no one-size-fits-all approach. The allocation differs from company to company depending on a variety of factors including the complexity, impact and prioritization of specific ESG factors along with the capability and capacity of directors, committees and management teams. For more information, refer to BDO’s Understanding the Board’s ESG Mandate.
Dynamic environments call for equally dynamic policy. There is a heightened interest in corporate political spending and response to social issues. The N&G committee can help to Board by focusing on the design and communication of policies governing these sensitive areas to ensure that they align with corporate culture and values and that corporate actions comply with such policies.
Governance Processes & Procedures
Corporate scandals and evolving risks keep boardroom responsibility and accountability under close review. The N&G committee generally takes responsibility for certain governance processes and procedures, such as the vetting of Board candidates, onboarding of new directors, and conducting annual Board evaluations that support and evaluate the quality of Board service and may require significant judgment. Independence reviews, for example, are not to be treated as a “check the box” exercise. The concept of the "gray director", which denotes how matters of independence may not always be “black and white,” is an increasing area of risk for Boards that may be too cozy or lack independence of thought. Consideration should be given to the new SEC universal proxy rules, as a shareholders' ability to put forward their own board candidate nominations becomes easier.
Onboarding of directors has become increasingly important for companies where Board diversity has led to more first-time directors and more directors from non-traditional talent pools (e.g., outside the C-Suite). The availability of onboarding support is instrumental in empowering directors for success in their roles through assimilation into the culture of the organization, understanding of individual roles and becoming effective participants in the boardroom. This includes having an onboarding process that provides resources, education and information on both immediate issues impacting the company and emerging areas of risk and opportunities that should be on the Board’s radar. Further processes that include mentorship – e.g., assigning “Board buddies,” shadowing experienced board members, and observing meetings of committees that the director does not serve on – can be highly successful tools in forming effective Boards.
While Boards have been conducting full Board evaluations for a long time, individual director evaluations are becoming more common. 85% of large and mid-cap N&G chairs surveyed reported that their Board conducts individual director evaluations, with the majority (58%) being conducted by the Lead Director or Board Chair. The quality of the evaluation process often comes down to the quality of the boardroom culture and Board leadership, which is predicated on the values of the company and how individuals embrace these and perform within the context of the full Board. Such an approach should consider factors such as capacity, length of term and relationships that may impact a director’s ability to remain independent in thought and action.
Ideally, companies should be regularly conducting robust individual director assessments focused on both performance and experience to ensure the needs of the Board and the organization are met – including encouraging fresh perspectives and the timeliness, relevance and depth of proficiencies, as necessary. There may be a very high functioning and valuable director who may no longer fit the needs of an organization. Directorship is a duty to serve an organization and directors should be self-aware of the value they bring to an organization and when it may be time to move on. For example, refreshment may be warranted because the director has fulfilled a specific role in assisting the company with a series of M&A activities or in the implementation of a cyber governance program and the director’s skillset now is better suited for another company. Another scenario necessitating refreshment may be capacity-related such as increasing responsibilities in their “primary role” or overboarding concerns.
The N&G committee often may need to help the Lead Director or Board Chair broker difficult conversations, leveraging Board evaluations and skills matrices aligned with strategy needs to facilitate refreshment. Conversations that explore how long a director intends to serve and what skillsets they will provide during that time, along with the actions to take when the fit is no longer there can be highly effective in setting expectations for service up front. Two-way, candid conversations including engagement by the Lead Director or Chair to gage the temperature of the Board, how it's performing and how people are feeling about other directors and their performance levels is critical. These are not necessarily performance conversations (although occasionally they may be), but moreover strategic alignment conversations. It is important for individual directors and the Board to identify when it’s time for a change.