Should skill matrices include boardroom behaviour?

The publication of board skill matrices from most ASX 200 companies is an excellent governance development. But matrices must go further: expanded information on directors that is aligned with strategy and, controversially, disclosure of boardroom behaviours and attributes.

Having interviewed hundreds of directors in the past decade, I believe the application of director skills (behaviours) is more important than capabilities.

Boardroom skill matrices do not provide this information. Understandably, they list boardroom skills and some attempt to relate them to organisation strategy, without giving too much away to competitors. They do not give stakeholders a sense of the board’s ability to apply skills or their depth of behaviours, such as capacity for resilience and contrarian thinking.

In fairness, ASX-listed companies, particularly larger ones, have done a good job of publishing matrices after changes in the Third Edition of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations, effective from July 1, 2014.

Recommendation 2.2 said: “A listed entity should have and disclose a board skill 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 skill base, provide useful information for investors and increase board accountability on director skills.

About 93 per cent of ASX 200 companies surveyed published a skill matrix, which is not compulsory under the “if not, why” principle in the governance guidelines, according to a recent KPMG analysis of the adoption of governance disclosures in the Principles for the 2015 calendar year.

I expect companies to provide more detailed information in boardroom skill matrices as they and the market become comfortable with the concept. Ensuring this information is better aligned with published organisation strategy is the obvious next step.

High-performing companies understand that boardroom skill matrices are too important to remain a “checklist” and not evolve. Their information, while basic, is a useful starting point for conversations between chairmen and the investment community over the board’s collective skillset. The matrix also sends a message that the board is serious about analysing its composition and addressing skill gaps.

The process behind the matrix’s publication is, arguably, more important than the information presented. Any investor can get a sense of boardroom skills by doing online searches of directors and reading their biographies. The real value is knowing the board has a dynamic system to identify, measure and disclose boardroom skills to the market.

Disclosing boardroom behaviours would take matrices to a new level

Governance exemplars and other early adopters should consider adding information on boardroom behaviours to their skill matrix. For example, is there a demonstrated capability for resilience on the board? Can the board quantify its level of professional courage and independent thinking? Does the board have capacity to encourage contrarian views and challenge decision-making biases?

Dr Vince Murdoch, of board consultant Murdoch Associates, believe boardroom behaviours can be quantified in the skill matrix. “Clearly, it is more challenging to measure and disclose behaviours than it is to do so with capabilities,” Murdoch said in the June edition of Company Director. “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.”

I agree. Boards should identify behaviours that drive consistent, strong governance performance. Then measure the extent of those behaviours on the board and disclose them in aggregate terms to the market through the board skill matrix.

Sceptics will argue that most directors claim to have resilience, courage, and are capable of independent thinking as well as being collegiate. The board nominated them because they had these and other behaviours. And sceptics will say that publishing information on boardroom behaviours adds a layer of unnecessary reporting and gets into too much general skill minutiae.

However, shareholders have a right to know if the board has directors who have governed through a crisis. Or if there are directors who have led significant organisational change programs in adverse circumstances. And if some directors have shown professional courage and challenged the prevailing view, even if it cost them their job.

It is possible to identify these behaviours in board evaluation processes, measure them on a spectrum (perhaps bi-annually) and disclose them in the skill matrix. The data must be based on demonstrated behaviours from a director’s governance or executive career, not based on anecdotes or assumptions, or left only to directors to self-report.

Behaviours are too important to overlook

Granted, the disclosure of behaviours potentially creates governance tensions if directors disagree on an internal or external assessment of their behaviours and attributes.

But it is worth the effort. Resilience, or the ability to govern through organisational setbacks, is the most important behaviour any director can possess, in my view. An ability to challenge the conventional view and avoid decision-making biases is a close second, as is professional courage. Yet stakeholders have to assume directors have these qualities based on their professional history, and hope the chairman and search firm (if used) has identified them when recruiting directors for nomination.

As with skills data, publishing information on demonstrated, aggregate boardroom behaviours would prompt more productive discussions on boardroom composition with investors. Early adopters in this regard would send a powerful message: their board thinks deeply about director skills AND the application of them in the boardroom through behaviours.

Done well, this information would challenge boards to examine “soft skills” that are typically the hardest to quantify, yet most important.

Boards could ask: Do we have enough directors who have governed through a crisis? Is the board capable of encouraging, listening to and, where appropriate, acting on a dissenting voice in the boardroom? Do we have directors who are professionally courageous and willing to fight for stakeholders, or stand aside if needed?

Behaviour gaps could be identified. For example, a board that lacks skill on governing through a crisis could provide director training on crisis-management. Another that is concerned about decision-making biases could train directors on techniques to avoid them.

Successful executives and directors know that behaviours trump skill and capabilities in the long run. And that the difference between great boards and the rest is having directors who have the right skills and an ability to apply them in the boardroom – directors with a knack of working with others, influencing, and helping find a consensus decision.

Disclosing director behaviours might not prevent corporate crises, but knowing that organisations systematically identify, measure and disclose boardroom behaviours is a considerable step forward compared to relying on assumptions about director performance.

Tony Featherstone is consulting editor of the Governance Leadership Centre and a former managing director of BRW and Shares magazines.