Key investors are watching skills matrices closely. They are looking for signs that the board takes its composition and succession planning seriously, aligns its skills and capabilities with the organisation’s strategy, and acts on skill gaps or overlaps among directors.
Investors are arguably more concerned about the process behind the skills matrix than its published information, which has been reasonably broad since the majority of ASX 200 companies started including matrices in their annual reports from the 2014-15 financial year.
“The chairman’s statement and board skills matrix in the annual report are a litmus test of board culture,” says Pru Bennett, head of investment stewardship, Asia Pacific, at BlackRock. “We can quickly tell companies that take the skills matrix seriously and those that do not get it. That data is put into our governance screens that feed through to BlackRock’s fundamental equities team.”
Bennett’s view on skills matrices is important. BlackRock is the world’s largest fund manager by assets managed, known for its governance analysis of large and small listed companies, and the Hong Kong-based Bennett is one of the region’s most influential governance analysts. “We accept that the skills matrix has limitations, but view it as a useful tool to help us identify quality boards,” she says. “Most Australian boards, overall, are aware of the importance of skills matrices. It is still in its early stages and we are witnessing an overall improvement in disclosure in this regard.”
Larger ASX-listed companies have made a reasonable start with including skills matrices in their annual report or other governance documents. Many ASX 200 companies now publish a skills matrix, which is not compulsory on the “if not, why not” basis of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (the Principles) .
The Principles’ third edition, effective 1 July 2014, meant the market had its first good look at board skills matrices, in volume, in the 2014-15 financial year. Some large companies were early adopters, but the revised principles created an expectation that disclosure of this information would be widespread among blue-chip stocks.
Recommendation 2.2 in the Principles said “a listed entity should have and disclose a board skills matrix, setting out the mix of skills and diversity the board has or is looking to achieve in its membership”. The accompanying commentary said the matrix could identify gaps in the board’s collective skill base, provide useful information for investors and increase board accountability on director skills.
In practice, companies are publishing a table that sets out the number of directors with skills and experience across a range of criteria. Matrix format and detail vary widely. Exemplars, such as BHP Billiton, provide skills information on the main board and key committees, while WorleyParsons does a good job of including the board’s sector and geographic experience in its matrix. Telstra Corporation provides a broader view of board skills as they relate to its strategic priorities.
Dr Vince Murdoch, Murdoch Associates director, says there has been a noticeable improvement in ASX-listed companies, private companies, not-for-profit (NFP) and government enterprises disclosing a skills matrix. “The information is becoming more detailed, better aligned with organisation strategy, and increasingly valuable for investors and other stakeholders.” Murdoch, a leading governance consultant, has helped several ASX 100, private and NFP organisations develop and disclose board skills matrices.
However, few companies are yet to disclose the process behind forming their skills matrix or link it to other governance information such as director biographies or director training. Also, the level of integration of skills matrices with board evaluation programs is unclear and few organisations disclose the next steps from their skills matrix analysis, for example, whether they intend to recruit a director with a specific skill, such as “international experience”.
A Company Director review of board skills matrices among the top 20 companies by market capitalisation found none had disclosed significant skill gaps, identified areas of skill overlap that needed to be addressed, or signalled other board-composition problems.
That is to be expected. High-performing boards think deeply about their composition and attract directors with the right mix of skills and experience. Many have had some form of skills matrices for years: a detailed matrix for internal board planning and director development, and a tamer public version.
Moreover, companies are limited in what they can say with matrices. Disclosing information on required board skills, such as the “need to recruit a director with UK experience”, risks exposing too much of their strategy to competitors. It can also provide information for proxy advisers to challenge boards on director elections, although proxy firms do not appear to be pouncing on this information so far.
Treading with caution
Companies, understandably, are being cautious with matrices. Like many governance initiatives, the information in skills matrices is expected to become more detailed over time as companies and the market get comfortable with the concept. Much like the “two strikes rule” in executive pay, the real value in skills matrices might be the conversations it prompts between chairmen and investors in board engagement processes.
But that does not absolve listed companies of the need to evolve their board skills matrix and find the right balance between helping the market assess the alignment of board composition and organisation strategy, without adding to governance or market risk. Some directors, under the condition of anonymity, told Company Director there was still too much box-ticking with board skills matrices and outsourcing of them to professional service firms.
Australia, a global leader in many corporate governance areas, can learn from large US organisations on board skill disclosure. The Walt Disney Company, General Electric Company and several other US multinationals are more advanced than most Australian companies in linking director skills to other governance information and providing detailed skills information.
Murdoch says most Australian skills matrices outline the first three of seven capabilities he believes should be included: functional skills, leadership and governance. The remaining four skills: business understanding, knowledge of industry drivers, influence, and stakeholder and sustainability management skills have inconsistent disclosure.
Controversially, Murdoch believes boards should aggregate and disclose director behaviours in their matrix. For example, the board’s level of demonstrated resilience, professional courage, business curiosity and capacity for independent thought. “Clearly, it is more challenging to measure and disclose behaviours than it is to do so with capabilities,” he says. “But directors can be interviewed to rate their behaviours on a spectrum, or encouraged to self-report them. An ex-CEO who led a large cultural change program at their organisation during a crisis clearly would have strong, demonstrated resilience and courage.”
Murdoch believes matrices could even reflect the board’s capacity for dissenting views and its ability to avoid racing to a consensus decision. “I’d like to see, and I’m sure many chairmen would value, a dissenting voice inside the boardroom. Consensus may not always be healthy. For example, a director who challenges the culture, or who asks ‘What if these strategic assumptions are flawed?’ or ‘What would happen to this business if X occurred or Y changed?’ Even a director who challenges outstanding results, ‘What are we trading off to achieve this?’ Perhaps Volkswagen, Centro and other corporate problems might not have occurred if boards actively encouraged dissenting behaviours.”
BlackRock’s Bennett would like to see information on “soft skills” in board matrices, but accepts this is hard to disclose. “We want to know the processes a board goes through to ensure it does not recruit directors who all have the same mindset. We like to see directors on a board with different backgrounds and different ways of looking at issues and making decisions.”
She says BlackRock considers industry experience on the board as a “non-negotiable” and looks for signs that companies understand the need to evolve board skills as they grow. “The board of a mining explorer, for example, should acknowledge the need to change the composition of director skills or add to board size as the company moves into production,” she says.
Deborah Page AM FAICD, says the board skills matrix has merit as a governance initiative. Page is a former chairman of Investa Office Fund and a current non-executive director of Brickworks and BT Investment Management. “Companies that view the matrix as a form-filling exercise, or leave it all to the company secretary, or outsource it to an accounting firm, are wasting a valuable opportunity. The matrix is how boards show they have the right directors to govern the organisation’s current and future strategy. It is fundamental to good governance.”
Boards should initially approach the skills matrix as a blank sheet of paper, says Page. “Forget who is around the board table now and focus on the organisation’s five-year strategy and the skills required from the board to govern that strategy effectively. Then compare the nirvana board skillset to the board’s current skillset and organisation strategy, and identify gaps.”
Page says it takes courage for boards to disclose detailed skills matrices. “It requires a brave chairman to have a full and frank discussion with directors about skills. In some ways, identifying each director’s skill is the easy part. The hard part is the conversation around the required composition of skills and how directors with the same skills think about a similar issue. For example, a board of a supermarket company might have three directors with retail experience, but only one does the family shopping each week and understands what shoppers want when they buy groceries. These experiences matter in governance.”
The skills matrix can also prompt difficult succession-planning conversations with directors, says Page. “When finalising the skills matrix, the chair should talk candidly with each director and ask about his or her intentions to stay on the board. It’s no good forming a skills matrix in relation to the organisation’s five-year strategy if it’s unclear which directors and which skills will be on the board then. It’s very important that boards take a hands-on approach to the skills matrix because it can enhance succession planning and assist with director performance issues.”
Other chairmen believe the significance of board skills matrices is overstated. Peter Hay FAICD, chairman of Newcrest Mining and Vicinity Centres, says leading institutional investors have always been interested in board composition. “I don’t believe formalising director skills in a matrix has changed the conversation between investors and boards. It’s not hard to tell if a board has too many directors or too few with a certain skill or background.”
Hay says the skills matrix should not be a big task. “Good boards are well aware of director skills and any current or potential skills gaps, and typically produce this information internally. Disclosing some of it publicly is something all boards should be capable of. I don’t buy the red-tape argument that the matrix is a lot of extra compliance or work for boards.”
Neil Waters, managing partner of Egon Zehnder, a leading executive and director search firm, says boards are talking more about skills matrices in recruitment briefs. “The issue is potentially fraught with danger because some directors tick every box when asked if they are skilled in certain areas. I’m amazed at how many are suddenly experts in ‘digital disruption’. Alternatively, directors will object to findings from an independent third party who analyses board skills. It’s not easy for a chairman to tell directors they are not as skilled as they think they are.”
Waters says skills matrices are a “lazy way” to recruit directors or encourage others who lack certain skills to retire. “Boards spend all this time identifying skills, but far more important than the ‘what’ is the ‘how’ – how directors apply their skills. The best directors are those with the right style for the right board. The skills matrix tells investors nothing about how director skills are being applied around the board table.”
Boards should make their skills matrices as broad as possible, says Waters. “Having a bit of wriggle room to select the right director, rather than being overly prescriptive on skills, makes sense. In my experience, director fit for a board trumps skills and experience every time.
“From a recruitment perspective, board skills matrices are not worth dying in a ditch over. They should be a starting point for discussion, not an end point,” says Waters.
Michael Robinson, executive director of remuneration and board governance adviser Guerdon Associates, says boards should integrate their skills matrix with other information. “Companies generally have not yet joined the dots between the board skills matrix, director biographies, director professional development requirements and the board evaluation process. There is much room for improvement on how the reporting of director skills is tailored for organisations.”
Robinson cites inconsistencies between the skills matrix and director biographies. “The skills matrix will outline specific boards skills required for the organisation, yet the same bio about a director will appear in four different organisations where they are on the board. And information that companies give to shareholders before they vote to re-elect a director will have no reference to the skills matrix or the alignment of board skills with strategy.”
Board evaluation processes also lack clear linkage with skills matrices, says Robinson. “The great majority of board evaluation processes make no reference to the skills matrix. Boards are often evaluated on their overall competency, when directors should be specifically evaluated on their performance relative to the skills required of them.”
Robinson says boards could disclose, within reason, actions taken after a skills matrix is updated. “For example, they might disclose that the director professional development was facilitated by the comparison of the skills matrix and board evaluation process. Or that the board renewal process is assisted by reference to the matrix. The disclosure should be enough to show investors the board takes the skills matrix seriously, uses it to drive board composition and succession-planning issues, and that the matrix is dynamic rather than static information.”
Robyn Weatherley, general manager of governance at United Super (trustee of Cbus Superannuation Fund), says NFP organisations should follow the lead of listed companies and publish skills matrices in their annual reports. “Skills matrices are a critical governance and board planning tool. Even very small organisations should publish a matrix to show stakeholders that the board has the right composition of skills to govern the organisation and its strategy.”
Weatherley, author of the governance book, Eyes Wide Open , says the NFP sector can potentially disclose more detailed skills matrices than listed companies. “Charities and sporting organisations, for example, are often more open about their strategy and less affected by the ‘delicate dance’ of being as transparent as possible without giving too much away. The art of a good matrix is being able to align future organisation strategy with current board skills and identify any capability gaps, but what you’ll see online will depend on how much strategy insight is appropriate to disclose.”
Weatherley says skills matrices must be bespoke. “It’s not a template you can copy from other organisations. Each matrix must reflect the organisation’s situation and its industry context.” Done well, skills matrices can also be a useful investor relations and stakeholder communication tool, says Weatherley. “Boards can show investors through the matrix if they have considerable ‘bench strength’ and a good mix of skills and experience. Rather than only view matrices through a risk or compliance perspective, boards should see them as an opportunity to inform stakeholders and promote the organisation’s commitment to dynamic governance.”
Like others interviewed for this feature, Weatherley believes boards should own the skills matrix process and not outsource too much of it. “The board should drive the process and the CEO (if the company is small) or company secretary might draft the board skills matrix. It should be not a hugely technical document or something that cannot be produced internally. That said, there are benefits in sourcing external advice on the matrix every few years to get a second opinion and ensure the organisation is in touch with latest trends.”
The Australian Institute of Company Directors (AICD) has updated its popular Practical Tools for Directors and included them in its new online Director Resources Centre. The change is a precursor to the upcoming launch of the new-look AICD website.
The AICD’s member-only guides are among its most-used resources. More than 60 tools range from topics such as organising board calendars, to governing innovation, executive pay, and financial reporting.
The guides, typically three to four pages and presented in a template or checklist format, are a valuable resource for new directors and those seeking to refresh their knowledge.
Each tool’s content and format has been updated in the past 12 months and new guides, such as the one on board skills matrices, have been added to help directors. Director Q&A reports, which feature commonly asked director questions, have also been refreshed.
Industry engagement was part of the updating process. The AICD’s education team liaised with directors and governance consultants to ensure the guides had the latest information, were presented in the most useable format, and best met member needs.
The next step is tailoring the guides for the NFP sector and, later, for private companies and government enterprises.
Two guides can help directors who are grappling with board skills matrices: Checklist for Assessing Board Composition and Guidance for Preparing a Board Skills Matrix . The latter provides seven tips for boards on their skills matrix:
- Identify desired skills, experience and backgrounds of the board as a whole under relevant headings, and in the form of a matrix, map these against the skills and experience of each individual board member.
- Tie desired board composition to the organisation’s strategy and the key issues facing the organisation.
- Differentiate between the skills and experience expected for the board and for the chair.
- Separately prepare a skills/experience/background matrix for each board committee, where they exist.
- Include term expiry dates (where relevant) for each board member in the matrix to assist with succession planning.
- Use a rating scale when assessing the extent to which desired skills, experience and backgrounds exist on the board rather than a simple ‘yes’ or ‘no’ response.
- Have the board, or a designated committee (e.g. nominations committee) critically examine the matrix at appropriate intervals (e.g. annually).
The guide says boards should not include basic competencies that are expected of all directors (e.g. knowledge of director duties), or vague or overly general sets of skills or experience.
The guide also lists a number of important considerations with skills matrices that can prompt boardroom discussions on this potentially sensitive topic.