“A written, clearly defined, rigorous, formal and transparent procedure serves as a guide for the selection of Directors to ensure the appointment of high-quality individuals to the Board.” Principle 12, Nigerian Code of Corporate Governance, 2018 (NCCG).
The fate of an enterprise, shareholders, customers and other stakeholders is to a large extent dependent on the quality of leadership and oversight provided by the Board of Directors. To effectively discharge its responsibilities, it is imperative that the Board comprises of an appropriate balance of skills and diversity, without compromising competence, independence and integrity. The traditional practice of choosing Directors based exclusively on their “visibility” or “popularity”, is not in sync with the evolving demands of good corporate governance.
Rather than focus on assembling ‘glittering ornaments’, regulators, investors and other stakeholders are now demanding a more structured and transparent approach to Director selection and appointment to the Board. A formal and transparent process is as critical to gaining the confidence and trust of all stakeholders as it is to improving Board effectiveness.
The starting point in the recruitment of new directors is to determine the skills set and experience gaps on the Board and then define a set of criteria against which prospective Directors will be evaluated. The task of selecting and nominating candidates for appointment to the Boards is typically delegated to a Board Committee (Nomination or Governance). The Committee undertakes an initial assessment of the suitability of prospective candidates before making recommendations to the Board. The Committee in defining selection criteria and determining the skills and experience gaps on the Board, is expected to gather input from a variety of sources, including other Directors.
A clearly defined profile or competency matrix should be developed, distinguishing between qualities that are needed and those that are merely desirable. It should also include those qualities needed now and in the short to medium term. The critical qualities to look out for in a Board member can be grouped into three main categories namely; essential skills and experience; individual attributes and the diversity that the individual is bringing to the Board in terms of gender, ethnicity, age and other diversity considerations.
The NCCG recommends that while determining the requisite number of its members, the Board should consider the appropriate mix of knowledge, skills and experience, as well as the need for sufficient number of members that qualify to serve on committees. The Code recommends that diversity should be considered in the selection and nomination of new directors as it affords the Board the benefit of diverse perspectives and experience when dealing with complex issues. Careful consideration should also be given to conflicts of interest when considering prospective candidates, These will include individuals who are sitting on the Boards of companies in the same industry or business sector and those who have relationships that will always put them in situations of conflict of interest The Board should be mindful of public perception and seek to avoid situations where there might be perceived or real conflict of interest.
It is good practice to have a decent pool of candidates and prospective candidates may be sourced from recommendations by other Board members. The search should however be extended beyond the contacts of sitting Board members to make the process more robust. It is good practice to use Consultants and professional search firms.
Then follows the process of shortlisting potential candidates via a thorough assessment to determine suitability. The assessment will match the candidates’ background, skills, qualification and experience against the defined criteria and the specific needs of the Board at the material time. The Committee should determine at this stage, if there are any candidates that should be taken off the list due to issues such as conflict of interest, independence or because they already sit on too many boards.
Prospective Directors also need to perform their own due diligence on the target entity. Before associating with any organisation, a Director should first ensure that its values and objectives align with theirs. Formal and informal interaction with sitting Board members and Management, reading recent annual reports, and available public disclosure should provide enough information about the organisation. Where it is a new venture, a prospective Director should assess the professional and personal track record and antecedents of the founder.
As part of the assessment process, it is good practice to have the candidates meet informally with the Board Chairman and an independent director to determine appropriate fit and chemistry. Whilst a prospective Director might very well tick all the right boxes in terms of qualification, expertise and experience, he/she may have the potential of unsettling the dynamics on the Board. The Chairman is usually well placed to undertake this assessment.
The Committee thereafter recommends the most suitable candidates to the Board for further consideration. Typically, the Articles of Association allow the Board to fill vacancies on the Board and have such appointment ratified by shareholders at the next Annual General Meeting. Upon appointment, the new directors should undergo robust induction and onboarding as this is critical to the Board effectiveness.
The Board should periodically review its composition and refresh its membership to ensure it always has the appropriate complement of skills set and diversity to deliver on its mandate effectively. Boards are encouraged to pay sufficient attention to succession planning and develop medium-term succession plans that identify the balance of experience and skills that will be required over the short to medium term to maximise Board effectiveness. In doing so, the Board should consider term limits, independence as well as Chairman and CEO succession.
An effective Board is a cohesive team of well-rounded individuals who bring to bear their skills and experience in providing leadership, direction and guidance to Management, safeguard the interests of the Company and ensure profitable and sustainable performance. The Director Selection process to a large extent determines the effectiveness of the Board. It must be clearly defined, documented, transparent and objective. The Board should cast its net significantly far and wide and the process should be painstaking and robust to ensure the “right fit”. An unsuitable candidate can unsettle an otherwise cohesive Board. However, Directors should not be overly weary of “disrupting the chemistry” on the Board and thus restrict their search to those within their immediate network as this will not be in the best interest of the enterprise.