Publication Bridging the UK engagement gap through Swedish-style nomination committees

Executive Summary

Directors serve as the agents of a company’s shareholders. Their duty is to promote the best interests of the company. It is the shareholders who elect the directors for the system to work properly in the long-term. In the interests of those shareholders, it is essential that they find and elect the right people to serve on the board.

In the UK there is a lack of commitment on both sides to the investor-company relationship and there are weak incentives for engagement. Many of the larger shareholders in Sweden believe engagement with companies promotes long-term value creation. In Sweden there is a stronger tradition of commitment by major shareholders. This study looks at developments in Sweden over the last 15 years which have strengthened engagement from which valuable lessons can be learned.

At the heart of these developments is the proliferation of shareholder-led nomination committees and the impact that has had on company boards. There are differences in composition between Swedish and UK boards. The UK unitary board brings together executives and non-executives. In Sweden the board is primarily made up of non-executives, and the CEO is sometimes but not always a member. This may make a Swedish board look similar to a supervisory board in Germany. However, as in the UK, a Swedish board has the perational responsibilities of a unitary board. In Sweden, as in the UK, directors owe their duty to the company, and are accountable to shareholders.

In both systems nomination committees (NCs) are the body with responsibility for finding the right people to serve on boards. In the UK the NC is a sub-committee of the board. It is made up of board members. It is usually chaired by the chair of the board. Board candidates are proposed by the board’s NC to the company’s Annual General Meeting and, in the vast majority of cases, are elected as a matter of course. In Sweden, the NC is not made up of board members, but is usually composed of four or five of the largest owners of shares in the company, together with the nonexecutive chair of the board. It has its mandate from the shareholder’s meeting. In addition to recommending to the shareholders at the Annual General Meeting who should join the board, it also recommends the structure and amount of remuneration for each director. The shareholders then make the decisions. The remuneration of executive management is handled separately by the board.

This report looks at what the UK can learn from the Swedish system and whether a similar approach would work in the UK. This is timely given the reviews of corporate governance which have taken place in the UK in the course of 2008 and 2009. The search is on for stronger shareholder engagement and for a more diverse and challenging boardroom.