The Skills Set

Listed companies that treat the disclosure of their board skills matrix as a box-ticking exercise are missing an important governance and investor relations opportunity.

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.