Guidelines for the proper functioning of appointments and remunerations committees of listed companies
National Securities Market Commission
As part of its commitment to promote best practice in the good corporate governance of the country’s listed companies, Spain’s National Securities Market Commission has recently published a new set of technical guidelines on how the appointments and remunerations committees of these companies should be run.
The main objective is to make this body more independent so that it can improve how it operates and carries out the process of selecting and appointing board members and senior management, together with the remunerations policy.
We have summarized below the main contents of the technical guidelines:
- Independence. Committee members must act with independence, freedom of criteria and judgment, and an open mind, in particular when assessing potential candidates and specifically in the designation of independent board members when they have been proposed by executive board members who wield significant influence.
- Dialogue. The committee chair must ensure that a climate of constructive dialogue prevails among members, encouraging diversity of opinion. There must be direct contact between the committee and the Chair of the Board, the CEO and the coordinating board member.
- Resources and expert support. The committee must be able to access external advice if needed to handle particularly specialized or important matters, always bearing in mind potential conflicts of interest or incompatibilities. Furthermore, there must be an earmarked budget item that enables it to operate independently.
- Proportionality. The criteria in the guidelines must be applied and followed taking into account each institution’s characteristics, scale and complexity, its business and the sectors with which it deals.
Composition and functioning
Committee members must have knowledge and experience of corporate governance, analysis and strategic assessment of human resources, selection of board directors and senior management, experience of their own in senior management positions and design of the policies and remuneration plans affecting them.
The composition of the management body must be diverse and, in particular, in those institutions with a controlling shareholder, the guidelines recommend that there should be a majority of independent board directors, to strengthen the independence of the selection processes.
With regard to how they work, in the same way as the role of supervisor was described in the technical guidelines for the audit committees, as covered in Progreso 12, the committee should have its own set of regulations, timely access to information, the necessary time allocation of its members, sufficient resources and appropriate planning in place.
A minimum of three meetings a year is advisable, each to take place with a sufficient time span before the subsequent board meeting.
Assessing and selecting the board members
Fulfilment of the committee’s role of assessing and selecting the board members, should entail the following good practices:
- An analysis of the competences, skills and experience of the existing board members in order to better define the functions and aptitudes of the candidates filling the vacancies
- An analysis of the remaining board positions and, specifically, the maximum number of boards on which they can serve, in order to ensure they can discharge their duties effectively
- A definition of the profile and capabilities required before initiating each selection process
- Drawing up a template of the board’s competences that defines the aptitudes and skills of the candidates to the board and helps the committee to define the functions, competences, skills and experience that each vacant post needs
- A description of the reasons supporting the suitability of the candidate, indicating in each case the specific circumstances that were relevant in each decision
In addition, for the appointment, re-election and severance of independent board directors:
- Outsourcing the candidate search
- Enabling all board directors to put up names of possible candidates
- Requiring from the candidate a reasonable amount of information about their other activities and potential conflicts of interest that could affect them
- Informing the candidate, before proposing their appointment to the board, about what is expected of them (time dedication, participation, commitment)
- When making re-election proposals, bearing in mind the need to progressively renew the board
- Ensuring that any severance proposal affecting independent board members that the board is going to submit to the General Meeting originated in the committee itself
The guidelines also recommend that the appointment of the coordinating board member should be proposed by this committee.
The committee should prepare a succession plan for the Chair of the Board, the chief executive and the company’s most senior posts, in order to avoid or at least reduce uncertainties that could affect the institution. This plan must be reviewed regularly “to adapt it to the new needs and circumstances".
The committee should ensure that the remuneration policy for board members and senior management is clear, detailed, verifiable, based on objective criteria and consistent with the reality of the institution and its strategy.
The committee must review this policy every year to confirm that it is aligned with the institution’s situation and strategy, and also with market conditions, in order to evaluate whether it contributes to creating long term value and to appropriate supervision and management of risk.
It should also monitor whether executive directors’ and senior management’s contract conditions are being met and verify that they are consistent with current remuneration policies.
In addition, it must check that the remunerations policy is being properly applied, that unscheduled payments are not being made to board members and senior management; if the circumstances are such that the “malus” and “claw-back” clauses for recovering bonuses are applicable, it must recover the sums concerned.
The guidelines recommend that the committee be involved in the annual evaluation of the board of directors and its supporting management committees, so this body should have access to the results achieved and the action plans or recommendations that may be necessary to correct potential deficiencies detected or to improve how the organs of government work.
Should a board member resign their post before the end of their term, the committee should evaluate the information received from this individual and, if it feels it is right to do so, start a dialogue to find out why they took this decision, ensuring that the board makes these reasons public and that the annual corporate governance report contains an explanation.
As well as the committee’s core duties, the guidelines list other possible functions, consistent with current corporate governance trends:
- Involving the Chair of the committee, together with the coordinating board member, in the communication and contact with shareholders, institutional shareholders and proxy solicitors
- Review or verification of the information about the board’s remuneration that the company is required to disclose
- Review of the information within its area of responsibility that is posted on the institution’s website
- Participation in the possible updates of the board’s regulations as they concern its areas of competence
In any event, the guidelines make clear that the committee’s duties are not limited solely to the board members, but also concern the company secretary, senior management and, in general, those carrying out leadership roles under the direct oversight of the board, the executive committees or the chief executive officers.