Nomination committee

An independent director is supposed to hold management to account. That only works if management did not choose them.

So somebody has to decide who gets appointed, and the workbook is clear about who should not: the company's own executives.

The nomination committee is the board sub-committee that makes those appointments. The workbook's standard for it is the strictest of any committee in the chapter — it should be made up of independent directors and nobody else.

The logic is a chain. Independent directors appointed by independent directors owe the executives nothing.

The rule, in full. Section 7.6.2, item (iii): "Nomination committee for independent directors: The degree of independence of independent directors is likely to be high, if the company executives do not have a role in their appointment. Therefore, the nomination committee to appoint independent directors should ideally consist exclusively of independent directors alone."

And now the thing worth noticing. Section 7.6.2 is a checklist of 9 governance items, and for several of them the workbook gives 2 standards — the ideal, and what SEBI actually requires:

For the nomination committee, the workbook states the ideal and stops. It gives no percentage and no SEBI stipulation, unlike the 4 items around it. That absence is the fact to carry into the exam: the "exclusively independent" standard is presented as what should ideally happen, not as a stated regulatory threshold.

Where it fits in the chapter. Section 7.6.2 exists so that an analyst can "ascertain the corporate governance standards of the company," and closes with the reminder that regulatory standards are minimum standards — "it would be preferable if the companies follow even stronger corporate governance practices than those mandated by the regulator." A fully independent nomination committee is exactly that kind of voluntary strengthening.

Why an analyst should care. Section 7.6.2 links good governance to the prevention of agency risk: a company following strong standards "would be able to prevent agency risk or at the very least detect and rectify them in time."

Illustrative. A listed company with a 10-member board has an executive chairman. Its composition and its committees:

The first 3 pass. The fourth is the interesting one.

Nothing in the workbook says that 1 executive on a nomination committee breaches a SEBI threshold — it gives no threshold at all. But the managing director now has a vote on who joins the board to supervise him. On the workbook's own reasoning, the degree of independence of the next independent director appointed is lower, because a company executive had a role in the appointment.

An analyst records this as a governance observation rather than a compliance breach. If the company instead reconstitutes the committee as 4 independent directors and nothing else, it has adopted the stronger-than-mandated practice the chapter recommends — and the next appointment carries more weight.

Section 7.6.2 (Evaluating corporate governance) is one of the densest examinable lists in chapter 7, and the nomination committee is item (iii) of 9.

The questions here are comparison questions, because the committee composition rules differ from one another on purpose. Which committee must be entirely non-executive with an independent chairman? The remuneration committee. Which needs at least two-thirds independent? The audit committee. Which should ideally be exclusively independent, with no figure given? The nomination committee. Keeping the 3 apart is the whole task.

• The workbook gives no numeric threshold for the nomination committee. It states an ideal — exclusively independent directors. Answering with a percentage is answering a question the text does not support.
• "Ideally" is not "SEBI requires." For the audit and remuneration committees the workbook gives both standards. For this one it gives only the ideal.
• Do not swap the committee rules. Audit: at least 2/3rd independent. Remuneration: all non-executive, chairman independent. Nomination: ideally exclusively independent. 3 committees, 3 different tests, same page.
• The nomination committee appoints independent directors, not the auditors. Nominating the auditors is the audit committee's job under item (vi).
• "Exclusively independent" is stricter than "all non-executive." A non-executive director who is not independent would satisfy the remuneration committee rule but not the nomination committee ideal.
• The 50% and 1/3rd figures belong to the board, not to any committee, and they switch on whether the chairman is an executive director.