The board selection process: assembling the right pieces for a dynamic, effective and balanced board

August 2014 | PROFESSIONAL INSIGHT | BOARDROOM INTELLIGENCE

Financier Worldwide Magazine

Board diversity has been a key topic in corporate governance over the last year and might remain high on the agenda until the formal adoption of the gender balance initiative by the European Council. If the method chosen to promote gender diversity has been controversial, there was a common recognition that a more diverse board brings a broader range of perspectives, insights and views in relation to issues affecting the organisation.

Beyond diversity as such, what matters most for European boards is getting the right competencies and expertise needed to complement existing skills of the board and improve its value-added. If the goals to be achieved are clear, best practices are still needed in order to foster the right selection process and to define the right profiles, not only in order to fulfill legal requirements, but also to respond to a company’s specific needs.

Board composition is certainly a crucial condition to reaching the goal of good governance and board effectiveness. Finding the right mix of skills, experience and diversity to be successful is, however, not an easy task for shareholders and boards. It can be like trying to put a square in round hole or finding a path through multiple obstacles. The internal and external forces that can influence the board selection process are numerous.

The first determining factor is shareholder influence. Renewal of the board constitutes a cornerstone is a company’s life and shareholders have the duty to select a strong board as well as to monitor the quality of the board’s work and its performance. Shareholders’ rights and influence will be even more prominent in companies with controlled share ownership. In Norway, the CG Code goes even further and specifies that “the members of the nomination committee should be selected to take into account the interests of shareholders in general. The majority of the committee should be independent of the board of directors and the executive personnel”.

Even if the regulator does not want to dictate what type of board a listed company should have, legislators might also play a role in fixing some criteria for board selection. European institutions have, for instance, fixed some legal frameworks for the board selection process, including the EC Proposal on gender equality (with the objective of placing 40 percent of women in non-executive board member positions in listed companies), the EC Proposal on non-financial reporting (a board policy on all diversity aspects such as nationality, age, educational and professional background), the CRDIV requirements and EBA Guidelines on internal governance and on fit and proper individuals. If those building blocks can make the difference in terms of company efficiency, they certainly also have a stimulating effect; the quota regulations, for instance, give a boost in defining board profiles as vacancies for female directors. The legal requirements on board committees might also determine to a large extent the profiles to attract. The financial sector is in fact so highly regulated that being able to understand and to follow the evolution of regulations is in itself a criteria to select a board member.

However, there should not be a ‘one size fits all’ approach. A leading factor when defining a vacancy should be the strategic and business criteria. Boards should start a selection process with clear expectations. It is important to challenge assumptions and to think outside the box. Board members should have in-depth knowledge about the sector in which the company operates. However, this should not mean that boards should be composed only of experts. Forward looking perspective is critical for a board’s excellence. While boards with a controlling mindset don’t spend much time on strategy, interactive boards try to find people capable of planning for tomorrow. In fact, formal boards stick to rules and regulations (due to pressure coming from analysts, the press, the stock market and regulators) and focus mainly on compliance. Formal boards provide low visibility, low predictability and high complexity. The conditions for creating value consist not only in rules, practices and compliance but also in leadership, strategic development, innovation and executive drive. This is why it is important to minimise the time allocated to historical reporting and to challenge orthodoxies.

To reach board effectiveness, board dynamics have been identified as one of the most important drivers. The key is to develop a mix of personalities and diversity of thinking style as well as a good fit of personal profiles. A board should rely on trust, openness, mutual respect, shared vision and shared values. Even if personality tests are not used in the selection process, personal characteristics remain essential. Therefore, it is important to look beyond the CV and to consider the soft skills and the emotional intelligence (EQ) of the candidate, i.e., his or her capacity to listen and to build relationships. The board should look for members capable of working towards consensus rather than arrogant and dominant board members. To get a consensus-driven collegial body, it is important to avoid assigning full power to one individual. In that respect, the role of the chair is key to ensuring team spirit and an open mindset.

Given the huge number of criteria, companies should not consider independent directors as ‘the passe partout’ to arriving at an optimal mix. In practical terms, managing succession should be a fairly continuous process. Companies should start with a board evaluation to reflect on how the board functions and to specify its needs. In fact, the selection process should be embedded in a critical evaluation of board composition and its effectiveness. This should allow companies to identify where they may have deficiencies and to plan how these should be managed. Whenever there is a vacancy, one should not look for a copy of the board member that leaves. Boards have to adjust to economic changes and new challenges. Companies should then define the ideal make-up of the board in terms of factors including the balance of non-executive to executive directors, the appropriate diversity (including in relation to gender), skills, experience, personality traits and length of tenure of board members. Those criteria are essential to go from a long list of candidates to a short list and then a final list. External support should be used for key positions and this may include search firms. Headhunters and search firms can bring independence and professional opinion, as long as they receive a clear mandate.

In conclusion, board members have to adjust to the professionalisation of the board selection process by evaluating their potential for adding value to management functions. As for the financial sector, where the fit and proper process is in place, board members have to be ready to defend their case and sell themselves. The new Enhanced Voluntary Code of Conduct for Executive Search Firms goes in that direction and specifies that: “During the selection process, search firms should provide appropriate support, in particular to first-time candidates, to prepare them for interviews and guide them through the process”.

Béatrice Richez-Baum is secretary general of the European Confederation of Directors’ Associations (ecoDa). She can be contacted on +32 2 231 58 11 or by emial: beatrice.richez-baum@ecoda.org.

Béatrice Richez-Baum

European Confederation of Directors’ Associations