I suppose I have been quite critical of Nominet recently (here, here, here, here, here, here, here, and here, for instance). So I am pleased to say they’re suggesting something today with which I agree.
Today Nominet announced a ‘program for evolving the .uk namespace‘. Much of the release is to do with a new consultation on opening up .uk for registrations; I last blogged about that here. A new consultation is out on July 1, and from the announcement it sounds like far less of a dog’s breakfast than the last consultation. However, I’m going to hold fire on that until the consultation document comes out, and comment on something likely little noticed below it under the heading ‘changes to Nominet’s governance’:
Nominet is proposing changes to Nominet’s Board structure, which will be decided by Members at the company’s forthcoming AGM. These are:
- Creating an additional seat for the executive on the Board to bring this in line with a new senior structure. If approved, this will mean giving the executive with responsibility for member and channel engagement and business development – the Chief Commercial Officer – a Board level position.
- Extending the term for member-elected Non-Executive directors to 3 years from 2014 – bringing this into line with the 3-year terms for appointed Non-Executive directors.
- Removing the 6-year limit on non-executive director terms in order that the company can, if appropriate, continue to benefit from accumulated experience and continuity.
Full details of proposed changes will be included in the AGM voting packs later this week.
Here’s why I agree with these proposals:
Re the first proposal, Nominet has a board of 10 people. These are made up of 3 executives (including the CEO), 4 member-elected non-execs (in whose election the board takes no meaningful role), and 3 appointed non-execs (appointed in the normal way by a nominations committee, but subject to member approval); the last category includes the chair of the board. Arguably 10 is a lot, but Nominet is a fair size company and board responsibilities are increased by Nominet’s unique position and public service role. This means non-executive work-loads are heavier than in any other company I know (I did 11 years at Nominet as a non-exec, and have served as a non-exec for several other companies including a quoted main market company); I suspect having fewer non-executives would therefore be undesirable, as the work-load would increase further, and if non-execs find a substantial proportion of their working week is dedicated to one company (and most of their income sourced from there), they tend to lose their independence. Having only 30% of your board as executive members is unusual, especially for a private company in the UK. I can’t comment on the individual involved (having never met her), but bringing onto the board an executive with responsibility for ‘member and channel engagement’ helps rebalance this, and should help Nominet rebuild bridges with a membership from which it has recently seemed a little detached on occasion.
Re the second proposal, the current term for member-elected non-executives is 2 years. Having watched a number of non-executives join the board of Nominet, I can tell you it takes at least a year before the non-exec comes up to speed. Every non-exec I have asked agrees with this point. This means that even if the best possible non-exec is chosen by the members, for half their term they are ineffective. Moreover, board members from other constituencies do not suffer from this problem. I’ve been a supporter of three year terms for a long while, though I know this is a view far from universally shared. I’m very pleased Nominet has come around to this point of view, and using people’s time and skills better (whatever their views) seems eminently sensible.
I suspect the third will be the controversial proposal. Currently non-executive directors of both varieties are limited to a 6 year continuous term. Term limits normally exist as there is a perceived risk of people ‘going native’, i.e. losing the independence that they are meant to bring to a board. I’ve always been against term limits for member-elected non-executives – the end of my 11 year term preceded the introduction of term limits, so that’s not why! The reason is simply that the point of member elected non-execs (particularly now we also have appointed non-execs) is that the membership should be able to elect who they want. If Janet is particularly good at holding the board to account, much to the members’ satisfaction, why should the membership not be allowed to have Janet serving for more than 6 years? I quite understand why the members might not want Janet back (perhaps they’d feel she’d become too cosy), but to prohibit it in the articles seems perverse. Moreover, member-elected non-executives are not required to be independent anyway in the normal sense; they often have relationships with customers. So I am glad it is being removed in relation to member-elected non-executives. I am less sure about removing the term limit in respect of appointed non-executives, given that the recommendation for re-election comes from the board itself. However, on balance I think it’s correct to remove the term limit. The membership get the final vote after all, and if both board and members want a non-exec to stay on, why prohibit it? Rather, I think what the board should do is comply with the UK Corporate Governance Code (warning: broken MIME type) published by the FRC (which is meant for listed companies). I think these are a useful set of criteria to adapt, and for the nominations committee to consider in relation to appointed non-executives. In particular, I think appointed non-execs should qualify as ‘independent’, and thus the nominations committee, if recommending reappointment of an appointed non-exec that has already served six years, should explicitly justify why they consider that non-exec is still independent. I think this ‘comply or explain’ model is sufficient, given members have the final say.
So I will be casting my vote (for what it’s worth) in favour of these changes at the AGM.
Edit: it’s been pointed out to me that whilst B.1.1.1 talks about nine years, B.2.3 talks about six years, and says ‘Any term beyond six years for a non- executive director should be subject to particularly rigorous review’, so I’ve added this below. I think this actually strengthens my point, as the code considers the point, but says it is for the board (or its nominations committee) to make the call, and not the articles. I hope Nominet confirms it will be doing this ‘rigorous review’ in respect of appointed non-execs.
Extract from the UK Corporate Governance Code:
B.1.1.1 The board should identify in the annual report each non-executive director it considers to be independent. The board should determine whether the director is independent in character and judgement and whether there are relationships or circumstances which are likely to affect, or could appear to affect, the director’s judgement. The board should state its reasons if it determines that a director is independent notwithstanding the existence of relationships or circumstances which may appear relevant to its determination, including if the director:
- has been an employee of the company or group within the last five years;
- has, or has had within the last three years, a material business relationship with the company either directly, or as a partner, shareholder, director or senior employee of a body that has such a relationship with the company;
- has received or receives additional remuneration from the company apart from a director’s fee, participates in the company’s share option or a performance-related pay scheme, or is a member of the company’s pension scheme;
- has close family ties with any of the company’s advisers, directors or senior employees;
- holds cross-directorships or has significant links with other directors through involvement in other companies or bodies;
- represents a significant shareholder; or
- has served on the board for more than nine years from the date of their first election.
B.2.3 Non-executive directors should be appointed for specified terms subject to re-election and to statutory provisions relating to the removal of a director. Any term beyond six years for a non- executive director should be subject to particularly rigorous review, and should take into account the need for progressive refreshing of the board.