What are competencies and why are they important?
What is a competency? In Directors at Work¹, Kiel et
al. talk about the competencies of a director being the
experience, knowledge, skills, attitudes, values and beliefs
of the person. They provide the following framework for
considering these competencies:
- Industry: Experience in and knowledge of the industry
in which the organisation operates.
- Technical: Technical/professional skills and
specialist knowledge to assist with ongoing aspects
of the board’s role.
- Governance: The essential governance knowledge and
understanding all directors should possess or develop if
they are to be effective board members. Includes some
specific technical competencies as applied at board level.
- Behavioural: The attributes and competencies enabling
individual board members to use their knowledge and
skills to function well as team members and to interact
with key stakeholders.
The ASX Corporate Governance Council’s (ASXCGC)
third edition of the Corporate Governance Principles and
Recommendations touches on competencies of directors in
a number of recommendations. These recommendations
highlight the importance placed on balancing the
competencies of directors in publicly listed companies.
The same requirements are also desirable for the boards
of many unlisted organisations.
Firstly, Recommendation 1.2 states that:
“A listed entity should:
(a) undertake appropriate checks before appointing
a person, or putting forward to security holders
a candidate for election, as a director; and
(b) provide security holders with all material information
in its possession relevant to a decision on whether
or not to elect or re-elect a director.”
In the commentary to this recommendation, the ASXCGC states that this
includes, among other items of information on the director:
“biographical details, including their relevant qualifications and experience and
the skills they bring to the board.”
Secondly, Recommendation 1.5 deals with diversity and encourages boards to
promote diversity on the board, its committees and throughout the organisation.
By having gender, racial, age and other forms of diversity on a board it can be
expected that the board will have a wider range of competencies than having
too great a focus on any one background.
Thirdly, Recommendation 2.1 encourages boards to have a nomination
committee, among whose functions is reporting to the board on:
“the process for recruiting a new director, including evaluating the balance of
skills, knowledge, experience, independence and diversity on the board.”
Fourthly, Recommendation 2.2 states that:
“A listed entity should have and disclose a board skills matrix setting out
the mix of skills and diversity that the board currently has or is looking to
achieve in its membership.’ This recommendation is to ensure that investors
and other stakeholders can review the criteria related to competencies
the board sees as important in the selection of directors. The Corporations
Act 2001 (Cth) also has similar disclosure of competencies in mind in
the section dealing with annual directors’ reports, which apply to public
companies. Section 300 (2A) (10) (a) requires the publication in the
annual report of ‘each director’s qualifications, experience and special
A listed entity should have and disclose a board skills
matrix setting out the mix of skills and diversity
that the board currently has or is looking to achieve
in its membership.
Finally, Recommendation 2.6 states:
“A listed entity should have a program for inducting new directors and
provide appropriate professional development opportunities for directors to
develop and maintain the skills and knowledge needed to perform their role
as directors effectively.”
This recommendation acknowledges that competencies are not static, but need
to be continually updated.
What competencies should board members have?
There is no absolute list of competencies which apply to all boards. Each board
must review its own special requirements. The competencies required will be
impacted by factors such as:
- size of the board;
- committee structure of the board;
- whether the organisation is for-profit, not-for-profit or a government
- size, nature and financial position of the company;
- complexity of operations – lines of business, geographic spread of
- shareholder/member structure;
- the competencies of senior management;
- risks and challenges of the business
However, there is one competency that following the Centro case2
considered that all directors should have – sound financial and accounting
knowledge. This means the ability to read and comprehend the company’s
accounts, financial material presented to the board, financial reporting
requirements and an understanding of corporate finance. In the Centro case,
Justice Middleton made the observation that this is a key requirement that
a director cannot delegate to other directors, board committee, advisors or
Other competencies considered to be important for many boards include:
- Strategic expertise – the ability to understand and review the strategy;
- Legal – the board’s responsibility involves overseeing compliance with
numerous laws as well as understanding an individual director’s legal duties
- Risk management – experience in managing areas of major risk to the
- Managing people and achieving change – including experience as either
a CEO or senior member of a management team in a similar or larger sized
- Industry knowledge – experience in similar industries.
What personal qualities should
board members have?
While different directors can
bring different technical skills and
knowledge to a board, there are
personal qualities that are desirable
in all directors:
- Integrity – fulfilling a director’s
duties and responsibilities, putting
the organisation’s interests before
personal interests, acting ethically;
- Curiosity and courage – a
director must have the curiosity
to ask questions and the courage
to persist in asking or to challenge
management and fellow board
members where necessary;
- Interpersonal skills – a director
must work well in a group,
listen well, be tactful but able
to communicate their point of
- Genuine interest – in the
organisation and its business;
- Instinct – good business instincts
and acumen, ability to get to the
crux of the issue quickly;
- An active contributor – there is
no room on boards today for those
who do not contribute.
Commentators also suggest that
directors must ensure they have
adequate time to devote to the
To be accepted as ‘fit and
proper’, a director must
have the necessary skills,
diligence and soundness
of judgment to undertake
the duties of the role.
Are there any special requirements for APRA-regulated entities?
The prudential standards of the Australian Prudential Regulation Authority
(APRA) outline special requirements of directors of its regulated entities, such
as banks, building societies, insurance companies and superannuation funds.
There are ‘fit and proper’ standards relating to responsible persons who are
the directors and senior management of these entities. To be accepted as ‘fit
and proper’, a director must have the necessary skills, knowledge, experience,
diligence and soundness of judgment to undertake the duties of the role.
People who have been unwilling to comply with legal obligations, have breached
fiduciary duties, been negligent or deceitful, have been disciplined, disqualified
or subject to an enforcement action by a professional or regulatory body
regarding honesty and integrity, have been ‘substantially involved’ in a business
failure or held in bad repute in a business community are deemed to not be ‘fit
and proper’. APRA expects an annual review of a person’s fitness and propriety.
See, for example, Prudential Standard CPS 520 ‘Fit and Proper’ (August 2014).
1 Kiel G, Nicholson G, Tunny J A, Beck J, Directors at Work: A Practical Guide for Boards, Thomson Reuters Australia, 2012, p 203-4.
2 ASIC v Healey (2011) 196 FCR 291;  FCA 717.
3 ASIC v Healey (2011) 196 FCR 291;  FCA 717 at 174-175
This document is part of a Director Tools series prepared by the Australian Institute of Company Directors. This series has been designed to provide general background information and as a
starting point for undertaking a board-related activity. It is not designed to replace legal advice or a detailed review of the subject matter. The material in this document does not constitute
legal, accounting or other professional advice. While reasonable care has been taken in its preparation, the Australian Institute of Company Directors does not make any express or implied
representations or warranties as to the completeness, currency, reliability or accuracy of the material in this document. This document should not be used or relied upon as a substitute for
professional advice or as a basis for formulating business decisions. To the extent permitted by law, the Australian Institute of Company Directors excludes all liability for any loss or damage
arising out of the use of the material in this document. Any links to third-party websites are provided for convenience only and do not represent endorsement, sponsorship or approval of those
third parties, or any products and/or services offered by third parties, or any comment on the accuracy or currency of the information included in third party websites. The opinions of those
quoted do not necessarily represent the view of the Australian Institute of Company Directors.