Do we understand board appointments?

Loretto Leavy and Ruth Sealy from the University of Exeter Business School have been conducting research to better understand behavioural dynamics on boards and how they can drive positive change. In the first phase of their research, they analysed practice by looking at detailed reporting of FTSE 350 companies to develop guidance. The next phase will involve facilitated consultations on behavioural dynamics using their draft guidance. In this blog, the first in a series of six, Loretto and Ruth outline their findings in relation to the first process, board appointment.

We rarely explicitly focus on how we enable the people side of board effectiveness. When we do, we invariably think of appointments and nominations as key actions which place people on the board. This is indeed important, particularly in large organisations where there are also regulatory expectations. In our research we explored the various ways boards report managing the appointment process and found significant variation. From this, we have defined three levels of maturity in boards’ approaches to appointing (and nominating) directors. These must be navigated by the board chair, with regulators across the globe requesting that boards of large firms also involve the nomination committee (NomCom) in the process.

We found that understanding what maturity level is appropriate to your board requires an understanding of the board’s contextual pressures, different procedural steps, and potential outcomes. Therefore, it is necessary to consider appointments within the wider board ecosystem to maximise the board appointment approach strategically.

An appointment map of contextual pressures, procedures and outcomes

Specific appointment requirements have been in place for UK listed companies for over 20 years, and therefore UK appointment requirements can be generalised as mature. However, we investigated this further by taking advantage of detailed reporting in 50 FTSE companies. Our research found that, although all the companies reported on their appointment process, there was significant variance in approach. Analysing the differences, we were able to categorised them into three approaches:

1. reactive
2. pre-emptive
3.  proactive.

We have been careful to avoid defining any best-practice expectations as we find that it is necessary to understand contextual pressures, outcomes and interlinking procedures before determining the most proportional response for a particular board.

The procedure deployed in the majority of appointments in the sample included some aspect of open advertising or external search agency and an interview or assessment. Our research found differentiated procedural approaches, varying from agency-led recruitment of replacement directors (reactive), board-led process of director appointments aligned to current and future strategic needs (pre-emptive), and building on pre-emptive to include formal feedback from the other board people processes such as evaluation, and succession (proactive). The most proactive and mature approaches also normally demonstrate clarity on the process, clarity on who leads the process and detailed post-interview discussions before recommendation to the board.

The NomCom normally leads the process for the appointment of non-executives and CEOs, giving the board a ‘nomination’ for the role. The board will then approve the appointment. There was one outlier in the sample which used a candidate selected from a succession plan process. The CEO normally led the appointment process for executive directors, with NomCom involvement, although with newly appointed CEO’s the NomCom retained the lead role. Chair appointment was led by the senior independent director (a role in the UK listed system, similar to a deputy chair). For some appointments in our sample, a subgroup was appointed to carry out the detailed procedures, particularly when appointing the chair and CEO.

Contextual pressures can often be overlooked when approaching a new appointment. However, we found that the requirements and appointment process for a new role can be influenced by several different contextual pressures. The most prevalent in the sample were: institutional contextual pressures, such as regulatory or market expectations for change of the makeup of the board; organisational contextual pressures, such as a new business area necessitating a new board requirement; and board-level contextual pressures, such as the rotation of board members off the board, the output from a board performance review and the review of new skill requirements.

The expected outcomes are also a factor. This includes demographic diversity where, particularly in the UK, gender diversity above 40% and at least one minority ethnic director is expected on boards. Shareholder expected outcomes are also important to understand, particularly of dominant shareholder directors and post-merger boards. Markets may also have specific skills expected in a new director and these may need to be considered alongside the level of independence and time availability. The chair, NomCom and directors themselves may also set requirements for new appointments which reflect responses to contextual pressures, particularly board-specific needs such as the director’s fit with the board or dynamics. We found that reporting focused primarily on the output of the appointment itself, rather than the overall outcome which was suggested by one firm to be a board strengthened with enhanced capabilities.

At recent workshops held with company secretaries, the appoint maturity map was validated. We discussed the important role of the chair and nomination committee in reaching higher maturity levels as well as wider contextual pressures. We highlighted that the availability of company secretary resource to support the chair in appointments was a constraint in achieving more mature practices. The map was confirmed as useful guidance when planning for board appointment actions, to assist with reporting and for effectiveness reviews. In particular, the maturity levels are useful for defining what proportionally is appropriate to each board.

Why is a behavioural dynamics view of appointing important? 

Appointments are part of a bundle of actions deployed for board behavioural dynamics. We assume that there is no gap between reporting and the actions taken by the board. However, we are validating our findings against real-life experiences. This mapping is part of our work on defining 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. We are also interviewing chairs, board members and senior independent directors on strategic inclusion.

Our research is part of a board behavioural dynamics and strategic inclusion research programme.

Please register for further workshops here or to receive our programme updates.

Blog written by Loretto Leavy and Ruth Sealy, University of Exeter Business School