On the 2024 Nomination Committee agenda

Environmental, Social and Governance (ESG) factors continue to be critical considerations for businesses, investors and shareholders across all sectors. Whilst climate change remains front and centre, some of the challenges within the ‘S’ of ESG have rapidly risen on the agenda.

Oversight of ESG related risks, opportunities and reporting including regulatory requirements, new metrics and stakeholder pressure to ‘get it right’ starts with an ESG competent board. Boards need to have ESG risk and its impact on long-term value creation, top of mind. This will include an understanding of which issues are of greatest risk or strategic significance to the company, how they are embedded into the company’s core business activities and whether there is strong executive leadership behind the company’s response to ESG matters.

For example, oversight over climate risk will likely sit across several board committees. The Audit Committee may be best suited to issues around systems data and reporting, whereas the Remuneration Committee will be concerned with reward mechanisms that drive the right behaviors. For the Nomination Committee, the focus is on ensuring the board and senior executive team have the appropriate skillsets and development mechanisms in place. Overlap is to be expected, but coordination, information sharing and communication among committees is key. Wellbeing and Inclusion, Diversity & Equity (IDE) issues are firmly mainstream and remain high on the Nomination Committee's agenda. IDE is a key pillar within any ESG framework.

Oversight of these risks and opportunities is a significant challenge, involving the full board and potentially multiple board committees. Consider how the Nomination Committee ensures that the board and senior executive team have the appropriate skills (i.e. is this addressed as part of the annual board evaluation exercise?) and if the succession plans explicitly address ESG competency.

Core to the Nomination Committee’s role is ensuring that the board has the right combination of skills, backgrounds, experiences and perspectives to probe and challenge management's strategic assumptions and to support management in navigating the company through an increasingly volatile and fast-paced global environment.

In 2023, the Dubai Women Establishment launched the "Women on International Boards" program in collaboration with the world-leading Institute of Directors (IoD) and the Hawkamah Institute in the United Kingdom. This initiative is part of the Dubai Women Establishment's strategic plan for 2023-2027, which includes pioneering initiatives and projects aimed at qualifying and empowering women leaders in cooperation with prestigious international universities and institutions. This program represents a significant step towards increasing female representation on international boards, aligning with the UAE's broader goals of gender balance and empowering women in leadership roles across the corporate sector.

The UAE's commitment to promoting gender diversity and inclusivity is reflected in its approach to corporate governance. The SCA corporate governance guide encourages organizations to develop policies that focus on gender diversity within their board and executive administration. These policies aim to support and empower women through incentive programs, training opportunities and benefits.

Due in part to initiatives like these, progress has been made in terms of women on boards. Further progress is required in other areas to take a more holistic and intersectional approach to equality; including women in executive positions, disability and geographical heritage, as well as ‘invisible diversity’ traits such as socio-economic background and cognitive diversity. Diversity of international experience is also important for businesses operating across many different markets.

Key questions to consider

Is the Nomination Committee:

• working with the board and CEO to demonstrate leadership from the top? Employees should see commitment to building the company’s pipeline of diverse employees and board members in culture, actions and conduct.
• seeing for itself what things are really like on the ground?
• working with the board to set aggressive goals at all levels, including leadership and senior management, business unit heads, middle ranks and internships? As with other KPIs, diversity metrics should be a matter of business performance to track sustainable progress, not a “nice to have”.
• sufficiently skeptical when told that lack of progress is due to a “lack of qualified candidates?” The phrase is often misused as an excuse for insufficient recruitment efforts.

Understand the extent to which recruitment functions are connected to diverse communities, their ability to tap into a wide pool of diverse candidates and create challenging targets for recruiters and head-hunters.

Tell the company’s diversity and inclusion story in detail. An honest picture of the company’s goals and progress towards achieving them is important in terms of credibility and confidence. The way boards communicate, engage and report on racial diversity will be critical going forward.
Businesses that create frameworks that are transparent on the steps being taken to understand the issue within an organization, deliver a plan and regularly report on the outcome will signal to employees and customers their commitment to change and improve.

The continuing priority is to ensure that talent, in the boardroom and in the pipeline, is aligned to strategy, even where that strategy has changed significantly in reaction to the events of the last two years.

Demand for experience in business transformation, growth, technology and restructuring is likely to continue. Leadership styles have pivoted towards empathetic leadership. A broader understanding of issues affecting the workforce and wellbeing remain high on the agenda.

Consider what steps the Nomination Committee is taking to ensure the board, leadership and senior management team are fit for purpose and well placed to support sustainable growth. Further, understand which development plans are in place to support both senior managers and those in the pipeline.

Advisory boards might be considered as a mechanism to fill any skills gaps and support the board in the execution of its duties. Clarity over their role, authority and place within the organization’s governance framework will be key to success. Equally, the use of third-party advisors to support the board in areas where specific expertise is needed will likely continue.

Digitalization, robotics and AI are increasingly important components of many corporate strategies. Individuals with deep technological expertise can be hired at an executive level but board members still need to be able to ask the right questions, and, just as important, understand the answers, to be capable of contributing across the range of issues the board faces. For example, have the risks around inexperience been historically overstated? If not, have they now been surpassed by the potentially higher risk associated with a board lacking in technology literacy?

Consider looking beyond the 'usual suspects' to find people with different experiences and backgrounds, including those who have not served on a listed company board before. With appropriate induction, mentoring and coaching, new directors should be able to adapt reasonably quickly.

Finally, courage, integrity and emotional intelligence should not be underestimated as key requirements to help the CEO and organization recover and support growth once again.

Further, the SCA Corporate Governance Guide required that the Board shall conduct an annual evaluation of both the performance of its members and committees to strengthen its effectiveness.

The SCA Corporate Governance Guide puts diversity at the heart of good governance, requiring Nomination Committees to link their policies on diversity and inclusion firmly to their business strategy and to promote diversity in terms of new appointments.

If recent times have taught us anything, it is that having robust succession plans for times of stress as well as more benign times is critical.

Successors may be identified from ‘rising stars’ who have dealt with crises, those that sit on multiple boards who can share insight from other organizations, or have expertise in tech innovation. The trend for boards to identify talented individuals to become ‘board apprentices’, to observe the boardroom and provide independent feedback, as well as gain valuable training to reach board level, is increasing.

Potential candidates should be assessed to provide reassurance that they have demonstrated ethical behavior as well as being aware of the organization’s code of conduct. Boards should also review their due diligence requirements when recruiting new members.

Nomination Committees should, as far as possible, seek to preserve stability at the top of the organization by avoiding appointing the Chair and CEO in quick succession.

Similarly, Nomination Committees should, as far as possible, manage the retirement of board members so as to avoid losing too much ‘corporate memory’ in one go.

In the UAE, where the regulatory framework emphasizes transparency and accountability, companies are increasingly navigating the challenges of shareholder engagement.

Nomination Committees should carefully consider whether individuals will be able to discharge their duties diligently and effectively when appointing new board members or when existing board members seek additional board mandates. The Nomination Committee chair in particular should be wary of non-adherence to best practice.

Stakeholder perspectives are relevant for all board appointments and should be considered as part of succession planning and the selection process. Given the significant influence that a company's key stakeholders have on an organization’s success, the board's knowledge and understanding of the interests of stakeholders is vital.

To engage effectively with the workforce, international best practices tend to be one or a combination of:

• a director appointed from the workforce;
• a formal workforce advisory panel; or
• a designated non-executive director; or 
• an explanation as to why an alternative arrangement is considered by the board to be effective.

Key questions to consider:

• Is the Nomination Committee considering appointing a non-executive responsible for getting the voice of the workforce into the boardroom, and if not, should this be revisited? 
• Is there a formal process? 
• Are specific characteristics and skill sets sought? 
• Has consideration been given to tenure and rotation issues? 
• Is more than one designated NED necessary if the company has a large geographical footprint?

Workforce directors can provide tangible benefits to companies, particularly at a time when talent development strategies are being adjusted to meet the challenge of finding, developing and retaining talent.