The skills and experience of directors is a topic of critical importance to fellow board members and shareholders. There is continual debate regarding the optimum skill-set for a director, ranging from the need for financial literacy, the logical advantage of compliance experience, the added benefit of IT expertise and the utility of various entrepreneurial and strategy related factors.
Ultimately, the skills of a board’s directors need to align with the strategy and needs of the organisation, and not solely with a generic set of criteria.
What is right for one organisation may not be optimum for another, even one from the same market and industry.
To this end, organisations should seek to appoint directors that complement the particular strategy of the company in question rather than a standard list of skills.
Whilst many directors are often hired for technical skill or their ability to open doors, it is arguable that the most admired directors are recognised and remembered for the behaviour and decision making abilities.
The Corporations Act of Australia requires every director to exercise reasonable care, diligence and skill. It is therefore necessary for directors to have the appropriate knowledge, skill and experience to comply with their fiduciary duties to all shareholders.
Every board and its directors should have the collective and individual knowledge, skills and experience to make decisions that add value to the organisation as a whole.
The ASX Principles of Good Corporate Governance and Best Practice Recommendations state that:
‘Corporate performance is enhanced when there is a board with the appropriate competencies to enable it to discharge its mandate effectively. An evaluation of the range of skills, experience and expertise on the board is therefore beneficial before a candidate is recommended for appointment. Such an evaluation enables identification of the particular skills, experience and expertise that will best complement board effectiveness.’
Other guides within the industry, such as the APRA prudential standards APS 510, GPS 510 and LPS 510; require boards to assess their performance and that of individual directors at least on an annual basis.
Directors are appointed to the board because their specific skills, knowledge and experience will fill particular gaps in relevant competencies. It is important to acknowledge that not all directors will possess all necessary skills, but the board as a whole must possess them.
The skills which are crucial to a board’s success should encompass both generic skills and those specific to the industry of the organisation.
Senior Management Experience
Directors must have experience as a senior manager, given they have responsibilities as a communicator, decision maker, leader, manager and executor.
Moreover, the relationship between the CEO and the board of directors is vital to every organisation. Consequently, previous experience on the part of directors in a major decision-making role regarding policy and strategy will provide efficacy within the boardroom.
The additional benefit usually ascribed to directors with senior management experience is the ability to manage and navigate through organisational complexity, with greater ease than those who have not managed complex structures.
Listed Experience
Listed companies must adhere to ASX listing requirements and are subject to greater regulation within the Corporations Act. For example, directors have higher disclosure requirements under Section 191 of the Corporations Act. ASX listing rule 3.1 requires listed companies to disclose certain price-sensitive information to the market as it occurs.
Chair Experience
The Chair should be an independent director, responsible for leadership of the board and for the efficient organisation and conduct of the board’s functioning. The Chair should also facilitate the effective contribution of all directors and promote constructive and respectful relations between directors and between the board and management.
Audit Experience
All directors should have at least a basic understanding of financial statements. Audit experience gives directors the ability to critically analyse financial statements, thus contributing to the effectiveness and efficiency of their decision making.
Financial Literacy
Organisations have a language which usually centres on the ability to read and review financial or business presentations. An inability to read and interrogate financial information is a liability for a director in any organisation.
Risk Experience
Directors must have the ability to assess risk when making key decisions. This goes beyond risk mitigation and includes the ability to take considered risks for the long term benefit of the organisation, which align with the organisation’s long term goals.
Compliance Experience
Directors must understand the company’s governance responsibilities, such as compliance with local laws and regulations, as well as social responsibilities.
Strategy Experience
Directors are expected to have the ability to see the macro perspective of an organisation based on patterns, trends and cause/effect relations, so as to determine the raison d’être of the organisation. This requires sensitivity to, awareness for, and an understanding of the business and market environment, in addition to a practical grasp of the firm’s core competencies.
Relationship and Origination
Directors should be engaged in the business and have the ability to introduce and develop opportunities or use their knowledge and networks for the benefit of the organisation’s long-term strategy.
Investor Relations
Directors must be aware of current and upcoming issues which the organisation may face, particularly those that relate to their fiduciary duty.
This skill is central in enabling effective communication between the organisation and the financial community. Boards should be able to respond to inquiries from shareholders and investors, as well as others who might be interested in the organisation’s stock or financial stability.
The critical flaw many boards make is to either hire directors based purely on technical skills or seek the same skill set from each director.
The skills required should be viewed as a matrix. Provided the necessary skills are covered in the matrix, the board is then able to broaden the hiring requirements and build genuine diversity, which in turn leads to richer thinking and better decision making.
The major issue in hiring solely based upon technical skills is that skills erode over time. For example, a retired audit partner may be hired for skills that are potentially obsolete.
Beyond these generic skills, directors should also possess certain attributes as a member of a board.
These include the following.