Loretto Leavy and Ruth Sealy from the University of Exeter Business School have been researching how behavioural dynamics on boards can drive positive change. In the first phase, they analysed practice by looking at detailed reporting of FTSE 350 companies to develop guidance. The next phase involves a facilitated consultation on behavioural dynamics using their draft guidance. In this blog, the final in a series of six, Loretto and Ruth outline their findings in relation to ‘Reappoint.’
Although we invariably place a large amount of focus and resource on appointments, the process of continually refreshing the board via reappointment and re-election lacks rigor and transparency. Our research into 50 FTSE boards found that reappointment is the least-reported board process; our validation workshops confirmed that it is also the least used in practice. This is concerning as reappointment and re-election decisions are critical for the continuity of board performance.
Those workshops confirmed the three levels in our maturity maps. They also refined the description and delineation of the procedures, particularly via the inclusion of important informal discussions. Reactive approaches rely on statements of renewal with informal and implicit discussions; pre-emptive approaches can be informal or formal discussions which reflect director evaluation assessments, may include tenure and diversity overviews, and lead to renewal and non-renewal decisions; and proactive approaches are more of a decision point relating to the outputs of the interlinking processes (such as evaluation) also leading to renewal and non-renewal decisions.
Our guidance will propose that as a minimum all boards of large and highly regulated entities should move to considering both reappointment and non-renewal at annual and term-end decision points as aligned to the pre-emptive approach. We recommend that the nomination committee (NomCom) reinvigorates their explicit oversight of this important process to ensure the ongoing maintenance of their board’s capabilities, commitment and contribution. We will carry out follow up workshops on director removal procedures as this is not captured in the sample, potentially due to confidentiality.
Reappointing approaches including re-electing
Non-executive directors (NEDs) are normally appointed on contracts for services for fixed terms of three years. At the end of this term, there is a formal renewal decision: ‘reappointing’. Executive directors are appointed on a rolling employment contract. NEDs and executive directors are subject to an AGM vote – the annual re-election. The significance of the annual re-election has increased in recent years as shareholders use the vote as an opportunity to express dissent on issues relating to board composition and design, and issues being considered by the organisation.
Although AGM votes rarely lead to a majority voting against, they set discussions in motion on the cause of any dissent – for example, concerns about overboarding. Curiously, in the sample, this led to increased disclosures on the specific issue highlighted rather than deeper representation of a robust process for reappointment. This may be partly attributed to reappointment decisions being underpinned by unreported implicit discussions, the presence and importance of which were confirmed in our workshops. The reporting gap may also reflect the lack of guidance on suitable reappointment and re-election processes. Workshop participants expressed a desire for advice on this; our maturity map addresses the how-to knowledge gap.
A map of reappointment contextual pressures, procedures and outcomes
We have outlined three levels of maturity for reappointment and re-election based on our sample of 50 FTSE board reports, comments from informal discussions and feedback from our validation workshops.
- Reactive approaches rely on statements of renewal with informal and implicit discussions.
- Pre-emptive approaches lead to renewal and non-renewal decisions based on informal or formal discussions which reflect the outcomes of director evaluations. They may also include consideration of tenure and board diversity.
- A proactive approach to renewal and non-renewal of board members presents more of a decision point, taking account of the outputs of interlinked board processes. The other behavioural processes heavily link to reappointing with inputs of contribution and performance from evaluating and acting, inputs from specific planned succession approaches, inputs from the composing and designing plans to address gaps, and inputs and outputs to development plans which can be used where gaps are required to be addressed.
A reactive approach is reflected by a standard statement in the annual report recommending reappointment and re-election, with infrequent recognition that this decision has been discussed by the chair, board or nomination committee. These statements occasionally cross-reference statements on the time availability and independence of the board member, along with any conflicts. Our workshops confirmed that this approach is supported by implicit and informal discussions.
Non-renewals in reactive boards relate almost exclusively to NED time availability – for example, they may not be renewed if they have taken on another role. Explicit non-renewal decisions relate only to those linked to merger transition plans, although these also feature in the other approaches. We do not recommend this reactive approach, although it may be proportionate for those boards which have dominant shareholders.
Pre-emptive approaches were led by the chair with support from the company secretary and oversight by the nomination committee. Statements of adequacy for a continued role linked to the outputs of board reviews, and took into consideration the director’s annual review which often referenced contributions, time availability, conflicts and potential future input.
Pre-emptive boards take explicit decisions on whether each NED meets the future strategic needs of the board and the organisation. The process can lead to explicit decisions not to renew a NED or to seek NEDs with different skills. Our workshops noted that this process includes informal and formal discussions. We recommend that this pre-emptive approach should be seen as the baseline for boards that are complex, diverse and reacting to significant challenges.
Within our sample we found examples of proactive boards that consider feedback from other behavioural dynamics processes when making reappointment and renewal decisions. This included assessment of the fit of board member skills to company strategy, as well as the behavioural fit of the director with the board. Wider contextual inputs that could affect the demands placed on the board – such as influences of the external market, company position in that market, additional regulation and the expectations of stakeholders – were also taken into account.
We consider this approach to be aligned with the progressive refreshment of the board cited as good practice in CGI’s terms of reference for nomination committees. It also reflects our recommendation to interlink board people processes, with oversight by the nomination committee.
Other considerations
In our sample we did not find an explicit link between diversity considerations and reappointing. However, the workshop confirmed that board diversity frequently did influence decisions, particularly where there was a regulatory impetus to achieve and maintain a certain degree of board diversity.
Our guidance will propose that all boards of large and highly regulated entities should consider both reappointment and non-renewal at annual and term-end decision points; this would align with the pre-emptive approach. We recommend that the nomination committee should reinvigorate its explicit oversight of this important process to ensure the ongoing maintenance of their board’s capabilities, commitment and contribution.
Workshop discussions highlighted that directors who continue in office to their maximum tenure is seen as a good outcome, particularly where development plans can be used to address any barriers to renewal.
Further work is needed on the practical steps for non-renewals and resignations. In our sample, where departures had taken place, the majority of reports did not include the rationale. However, with light investigation, the reasoning behind these departures can be uncovered. Although our guidance is focused on practice, our workshops also discussed barriers to reporting. It was felt that reporting in cases where sensitive issues had influenced decisions was challenging. We did note, however, a number of examples where boards had reported sensitively on non-renewals. Workshop feedback noted that informal and implicit discussions on board member fit and performance may result in directors submitting resignations rather than formally being non-renewed. We will run a further session on non-renewals and resignations once we have published the guidance.
Recommendation that the nomination committee reinvigorates reappoint oversight
While our report sample indicates that the nomination committee is involved in discussions around reappointment and renewal, there is ambiguity as to how the responsibility of the chair interlinks with nomination committee oversight and recommendations to the board. Therefore it is not clear the level of involvement of the nomination committee at the three maturity levels or the responsibilities undertaken by the different parties.
Boards are ultimately accountable for recommendations for reappointment and re-election to the AGM. However, it is imperative that the nomination committee has explicit oversight of these decisions, which are core to its function of ensuring appropriate membership on the board, and directly linked to the appointing role in which we invest a large amount of resources and time. We hope that our maturity map and guidance will assist in addressing the lack of advice on this topic.
Board behavioural dynamics
Re-appoint is just one element of the suite of actions contributing to board behavioural dynamics. This mapping is part of our work to define the ecosystem for board behavioural dynamics. It is sector and jurisdiction agnostic, although size is a factor, with the mapping aligned to boards of large highly regulated companies and organisations. Our research is part of a board behavioural dynamics and strategic inclusion research programme. We are also interviewing chairs, board members and senior independent directors on the design strategies.
Please register here to interact with our research or to receive our programme updates.
Loretto Leavy FCG and Professor Ruth Sealy, University of Exeter Business School
