The SEC Code of Corporate Governance provides that the Board may in addition to the Audit Committee required by the Companies and Allied Matters Act, establish a Governance & Remuneration Committee as well as a Risk Management Committee, as the Board may deem appropriate depending on the needs and industry requirements of the Company. The CBN Code of Corporate Governance for Banks on the other hand requires that the Board shall establish in addition to the Risk Management and Audit Committees, a Governance and Nomination Committee.
According to both Codes, the Governance & Remuneration (or the Nomination) Committee shall comprise solely of Non-Executive Directors (NEDs) The CBN Code contains a proviso in this regard – the Governance and Nomination Committee shall be composed of a combination of both Executive Directors and NEDs only where it is not saddled with issues of Remuneration.
One of the most critical roles of the Governance and Nomination or Remuneration (as the case may be) is that of identifying and recommending suitable prospective Directors to the Board. The SEC Code states clearly that the Committee shall establish the criteria for Board and Committee membership, review candidates’ qualifications and any potential conflict of interest, assess the contribution of current Directors in connection with their re-nomination and make recommendations to the Board.
Before the advent of the Codes of Corporate Governance in Nigeria, not much attention was paid to how individuals got appointed to the Board, or to matters pertaining to Board composition and the balance of skill and experience of the Directors on the Board. However, like the UK Corporate Governance Code, the SEC Code now provides that there should be a written, clearly defined, formal, rigorous and transparent procedure for the appointment of Directors to the Board and that the criteria for the selection of Directors should be defined to reflect the strengths and weaknesses, required skills and experience, as well as the age range and gender composition of the Board.
Buttressing the relevance of diversity of skill, experience, age and gender on the Board, to Board effectiveness, the Financial Reporting Council (FRC) Guidance on Board Effectiveness states that ‘Diversity in boardroom composition is an important driver of a Board’s effectiveness, creating a breadth of perspective among Directors and breaking down the tendency towards “group think”.
The spirit and letter of the Codes of the Corporate Governance is that the search, selection process and recommendation to the Board of prospective candidates should not be the prerogative of the Chairman or the MD/CEO but that of the Governance and Nomination Committee. It is expected that as a body composed of Non-Executive Directors, a greater level of objectivity, transparency and independence to the entire process is guaranteed.
The Committee has a responsibility to identify and recommend candidates based on the need to fill any skill or experience gap on the Board and should be guided by the need to recommend candidates who would not only add value but act in the best interest of the company at all times regardless of whether or not they have been nominated by a majority shareholder. The Committee is expected to conduct background checks on Board nominees to determine to a reasonable extent that the nominee is a fit and proper person and has not been disqualified from holding the office of a Director. The back ground check will also help to ascertain whether there is any real or potential conflict of interest, including whether the nominee is an interlocking Director.
The key responsibilities of the Committee are however not limited to Director Selection, but would typically include amongst others:
- Ensuring that a succession policy and plan exists for the position of Chairman, CEO/MD, the Executive Directors and the subsidiary MDs for group companies;
- Recommending an appropriate remuneration policy for Directors and Executive Management as well as the compensation structure for Executive Directors;
- Overseeing the Board’s annual evaluation of its performance and the performance of other Board Committees;
- Reviewing and making recommendations to the Board for approval of the company’s organizational structure and any proposed amendments.
The Committee has a responsibility to ensure for instance that the Board evaluation process is not a “box ticking exercise” but a means of realigning the Board’s focus and activities in line with the organization’s strategy. It should also ensure that a formal orientation/induction programme is in place for new Directors and that Directors receive ongoing training and development.
Ultimately, the responsibility for appointing Directors to the Board rests with the Shareholders at the Annual General Meeting. It has been argued that substantial shareholders will always determine the composition of the Board as it is their prerogative to nominate Directors. Whilst this argument cannot be faulted in many cases, it does not detract from the need for the Board through the Governance and Nomination Committee to define the selection criteria and identify the skills and competency gaps required to improve the effectiveness of the Board. These will guide the nominating shareholder and ensure that the Board indeed has a say in determining the appropriateness or otherwise of Director Nominees. The Board has a responsibility, through the Governance and Nomination/Remuneration Committee to ensure that individuals that are put forward as Directors for shareholder approval meet the minimum standards stipulated by law and the Codes of Corporate Governance.
As with other Board Committees, the Governance and Nomination Committee should have a comprehensive Charter that defines its role and responsibilities, authority limit, composition and tenure. The role of the Board Governance and Nomination/Remuneration Committee within the corporate governance framework is critical as it is responsible for ensuring that the Board is well equipped to discharge its duties optimally and effectively.