The ASX Corporate Governance Council’s (‘ASXCGC’) Corporate Governance Principles and
Recommendations 3e (2014) (‘ASX Principles’) state in Principle 2 (Structure the board to add value) that:
“A listed entity should have a board of an appropriate size, composition, skills and commitment to
enable it to discharge its duties effectively.”
The key goal in selecting directors
is to build a mix of individuals that
can work as a well-rounded team.
A formal and transparent procedure
for the selection, appointment and
re-appointment of directors to
the board helps promote investor
understanding and confidence in that
process. It can be difficult to remove a
poor choice of director, so it is worth
investing in the process. A wellperceived
appointment can enhance
a company’s reputation and market
standing, which may have flow-on
effects for the organisation such as
easier access to finance.
What are general key competencies for directors?
There is no absolute list of competencies that apply to all boards. Each board
must review its own special requirements. The competencies required will be
impacted by a number of factors:
- 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
- The organisation’s strategy
- 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
which following the Centro case1
it is considered that all directors
should possess – 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 management.²
Other competencies which are
considered to be important for many
- 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 and
- 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 organisation;
- 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 view frankly
- 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 organisation’s affairs.
How does a board analyse its specific needs?
The board is responsible for ensuring that the skills, knowledge and experience
needed to effectively steer the organisation both now and in the future
are represented on the board. An analysis of the current board’s skills and
experience in relation to organisational strategy and future goals will help in
identifying gaps in knowledge and targeting selection criteria. Directors should
be appointed for their special skills and knowledge that will assist with the
issues and opportunities the company is facing.
This is done using a board skills matrix. In a board skills matrix the board
sets out the specific skills it requires. These skills include industry related
competencies, specific technical skills such as accountancy or legal, specific
work-related experience such as being a CEO or risk manager, governance
related skills such as having completed the AICD’s Company Directors Course,
diversity attributes and behavioural skills. The skill set of exiting directors
is then mapped against this matrix, identifying any current gaps as well as
allowing a specification for new directors when a vacancy arises. The ASXCGC’s
Recommendation 2.2 now makes this a specific recommended requirement for
all listed companies.
“ The desired time
also be quantified.
The board should
consider the number
and nature of other
commitments that a
potential director has
to ensure that they
can effectively fulfil
their legal duties and
If an organisation has special needs or exposure to a particular stakeholder
group, it makes sense to include a director who has experience in that area.
For example, a company that spends a great deal of time doing business with
government may need someone with first hand experience of the political
process. This will be included in the skills matrix.
The board’s needs will alter as an organisation reaches a new stage in its
lifecycle. Therefore, when defining needs, consider where the organisation is
heading as well as where it is now. Expanding operations into new product/
service or geographic areas, planning acquisitions, staving off a growing
competitive threat etc, will impact on the skills and knowledge required by
The desired time commitment must also be quantified. The board should
consider the number and nature of other directorships and commitments that
a potential director has to ensure that they can effectively fulfil their legal
duties and responsibilities for this organisation.
The board should also review the provisions in the organisation’s board
charter, which may have a bearing on the selection of directors, and the
constitution, which will outline appointment procedures.
Listed companies have additional considerations, such as complying with
the requirements of the ASX Principles. For instance, these principles
recommend that the majority of the board be independent and that the
board consider diversity as a key component of its skills matrix. In addition,
for listed entities the ASX Listing Rules now require that each director is of
‘good fame and character.’3
Financial services companies (including banks, building societies, credit
unions, life and general insurers, friendly societies) also face special
requirements from their regulator, the Australian Prudential Regulation
Authority (APRA). These requirements are outlined in APRA’s Prudential
Standards on ‘Governance’ (for example CPS 510) and ‘Fit and Proper’ (for
example CPS 520).
Finally, under the Australian Charities and Not-for-profits Commission (ACNC)
Governance Standards, registered charities are required under standard 4
to ensure that ‘responsible persons’ (such as board or committee members
or trustees) are not disqualified from managing a corporation under the
Corporations Act 2001 (Cth) or disqualified from being a responsible person
of a registered charity by the ACNC Commissioner.⁴
What are the gender diversity requirements for listed companies?
Diversity of membership of a board is acknowledged as an important element in
achieving a balance of ideas. While diversity covers a range of human attributes,
the major type of diversity currently discussed in contemporary corporate
governance is gender diversity. Regarding gender diversity, the percentage of
women serving on boards worldwide remains low. In Australia, the percentage of
women on boards of ASX 200 companies and the proportion of women comprising
new appointments increased significantly in recent years. At 30 November 2015,
the percentage of women on ASX 200 boards was 21.5 per cent.
For listed companies, the third edition of the ASX Principles requires companies
to establish a diversity policy that includes measurable objectives in relation
to gender diversity. Companies are required to report their achievements against
their measurable objectives on gender diversity in their annual report.
The specific requirements of Recommendation 1.5 are:
“A listed entity should:
- Have a diversity policy which includes requirements for the board or
a relevant committee of the board to set measurable objectives for
achieving gender diversity and to assess annually both the objectives
and the entity’s progress in achieving them;
- Disclose that policy or a summary of it; and
- Disclose as at the end of each reporting period the measurable
objectives for achieving gender diversity set by the board or a
relevant committee of the board in accordance with the entity’s
diversity policy and its progress towards achieving them, and either:
- The respective proportions of men and women on the board,
in senior executive positions and across the whole organisation
(including how the entity has defined ‘senior executive’ for these
- “If the entity is a ‘relevant employer’ under the Workplace Gender
Equality Act, the entity’s most recent ‘Gender Equality Indicators’,
as defined in and published under that Act.”
While only applying to listed companies, many other boards of large
organisations have adopted similar diversity policies and are conscious of the
need to ensure gender diversity, among other types of diversity, on their boards.
“ While diversity covers
a range of human
attributes, the major
type of diversity
currently discussed in
governance is gender
gender diversity, the
percentage of women
serving on boards
worldwide remains low.”
What does a nomination committee do?
Many larger organisations have established a board nomination committee to
manage succession planning for the board and executives.⁵ This ensures that
a list of potential candidates relevant to the organisation’s strategy and future
goals is always on hand. The committee’s responsibilities will be outlined in
a charter and will usually include identifying strengths and weaknesses, skills
and experience gaps in advance of anticipated vacancies such as retirements
and preparing strategies to improve the board.
The ASX Principles provide good guidance on the role of a nomination
committee. Recommendation 2.1 recommends that listed companies establish
a nomination committee. They see the committee’s role as:
“being to review and make recommendations to the board in relation to:
- board succession planning generally;
- induction and continuing professional development programs for
- the development and implementation of a process for evaluating the
performance of the board, its committees and directors;
- the process for recruiting a new director, including evaluating the
balance of skills, knowledge, experience, independence and diversity on
the board and, in the light of this evaluation, preparing a description of
the role and capabilities required for a particular appointment;
- the appointment and re-election of directors; and
- ensuring there are plans in place to manage the succession of the CEO
and other senior executives.”
While a nomination committee is not essential in smaller or non-listed
organisations, many larger non-listed organisations find that they most helpful
to undertake what can be a demanding workload.
How does a board find candidates for a board position?
In the past, boards have typically relied on their informal networks to find
suitable candidates to fill board positions. The demand for accountability is
now making the selection of directors more open and transparent. Boards can
no longer rely on personal networks and retiring senior executives from their
own industry to provide the range of skills and experience they need. A good
professional search firm will suggest candidates from further afield. The issue of
using search firms is discussed further below.
How to deal with shareholder
request for board seat?
There have been recent prominent
examples of a shareholder seeking
a seat on the board. Often in
Australian companies, a shareholder
with 15 per cent or greater ownership
will get a seat on the board. However,
there are examples when a board has
rejected such a shareholder where
it is not considered to be in the best
interests of the company as a whole.
Usually, the shareholder will approach
the chair of the board and then the
matter is discussed by the board as
a whole. The board can appoint the
proposed director and then endorse
his or her election at the next annual
general meeting. If this does not
happen, any shareholder with 5
per cent of a public company can
requisition an extraordinary general
meeting to consider the position of
For a discussion of shareholders on
the board and ten tips for boards in
dealing with shareholder requests for
board seats, see ‘Taking a shareholder
“ A key feature of an
effective board is
independence of mind.
A board full of directors
always agreeing with
each other will not
What is the Australian Institute of Company Directors
The Australian Institute of Company Directors has developed a customised
program to better assist members looking for directorships and connecting them
with organisations seeking board members. This directorship search service has
been designed to specifically address the issues of greater visibility and control
over finding new directorships on Australia’s private, public and not-for-profit
Should search firms and specialist recruitment consultants be used?
Boards may find search firms useful when seeking a new director with the right
skills and experience for their business. Search firms can make recommendations
from a huge array of contacts, from highly experienced directors to new
directors with a breadth of practical experience. They can introduce candidates
whom the board might not have considered and can increase success in finding a
director with the right skills.
However, the use of such advisors depends on the nature of the business and
the skills that are needed on the board. If a search firm is used, the board must
actively manage the involvement of the search firm in the process. Boards will
either use the nomination committee, if one exists, or appoint a small group
of directors to liaise with the search firm and then in conjunction with the
firm to develop the initial list of potential candidates to a short list of three to
five persons. The whole board should be involved in the selection of the final
person. The search firm can then do a thorough background check to ensure
that the person has not embellished their curriculum vitae and meets any other
requirements, as set out below, required by the board.
While very valuable, these services can be very expensive and may be beyond
the reach of SMEs and smaller not-for-profit boards.
Should personal networks be used?
Personal networks can be a valuable source of information about potential
candidates. The chief advantage of using a network is that there is first-hand
knowledge of a candidate’s working style. This will assist in determining whether
a director will be able to work in a collegial manner with other directors.
Caution is needed, however, to ensure that the board is not filled with ‘mates’.
A key feature of an effective board is independence of mind. A board full of
directors always agreeing with each other will not function efficiently. The board
must be comprised of people who fill a defined need, challenge the status quo,
ask appropriate questions and are persistent in getting answers. Just relying on
the contacts of exiting directors has been identified as a major reason for the
historic lack of diversity of many boards of major companies.
Should the board do background checks?
As mentioned above, there are now standards which are
required of directors of different classes of companies
such as listed companies and charities. Also given the legal
responsibilities that directors face and the collegial nature
of an effectively functioning board, directors must trust and
respect each other. Therefore, it is advisable to substantiate
information provided by a candidate about themselves.
Some people are unable to act as a director. This includes
people who are undischarged bankrupts or who have been
convicted of certain types of offences.7 The court also has
discretion to disqualify individuals from being directors if
the individual breaches certain civil penalty provisions of
the Corporations Act 2001 (Cth).8
As a starting point, boards should devise a policy on
selection and appointment procedures that includes the
minimum level of background checking the board views
as necessary. For larger organisations using a search or
recruitment firm, part of the firm’s brief will include an
instruction to verify the CV’s information to the level
suggested by the policy statement.
Smaller organisations can use a variety of free or feebased
services to confirm information. At a minimum,
they can check information with the Australian Securities
and Investments Commission (ASIC) using the sources
below, speak with the candidate’s referees and verify
Free sources on ASIC’s website through ASIC Connect include:
- National Names Index – an index of registered
companies in Australia;
- Register of Banned or Disqualified Persons.
“ A key feature of an effective board is
independence of mind. A board full of
directors always agreeing with each other
will not function efficiently.”
ASIC also has an Enforceable Undertakings Register, which
can be searched online.
Note that there are limitations on the information offered
by each of these searches.
An ASIC Service Centre or an information broker listed on
ASIC’s website can, for a small fee, search on a director’s
name and provide a list of all their directorships and terms
People are disqualified from managing corporations if they
are insolvent. The Insolvency and Trustee Service Australia
(ITSA) maintains the National Personal Insolvency Index
(NPII) and this can be searched through information
brokers listed on their website, again for a small fee.
The ACNC also maintains a list of disqualified ‘responsible
persons’ which can be accessed at the ACNC Register of
Disqualified Persons. However, at February 2016 no person
has yet been disqualified by the ACNC.
It is also becoming more widely accepted for police checks
to be conducted for a potential director. In addition, if the
organisation involves work with children, it is possible
that special working with children clearance will be
required. Potential directors should be advised that these
background checks will be undertaken and their approval,
in writing, sought before the enquiries are made.
What areas should a board consider
when reviewing potential candidates?
- Does the candidate have skills that would add value to
the board or fill a gap?
- Does he or she understand the organisation’s business?
- Can the candidate work as part of this team of directors?
- Does he or she have sound business instincts and judgment?
- Does he or she have a proven track record?
- Is the candidate genuinely interested in the organisation,
its business and people?
- Is the candidate honest and a person of integrity?
- What other directorships and commitments does the
How does a board communicate
its expectations to new directors?
Executive directors will normally receive and
sign an executive service agreement or contract. Nonexecutive
directors generally receive and sign a letters
of appointment. Examples of current good practice are
provided by the ASXCGC in this area. Recommendation
1.3 states that:
“A listed entity should have a written agreement with
each director and senior executive setting out the
terms of their appointment.”
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.”
1 ASIC v Healey (2011) 196 FCR 291;  FCA 717.
2 ASIC v Healey (2011) 196 FCR 291;  FCA 717 at 174-175.
3 Australian Securities Exchange, ‘Chapter 1: Admission’, ASX Listing Rules, 22 September 2014, Listing Rule 1.1, condition 17, [www.asx.com.au/documents/rules/Chapter01.pdf].
4 Australian Charities and Not-for-profits Commission Regulation 2013 (Cth), s 45.20.
5 The ASX Corporate Governance Principles and Recommendations acknowledge that it may not be efficient for a small board to establish a nomination committee. Companies without a formal nomination
committee should ensure they have other processes in place to raise the issues that would otherwise be considered by a nomination committee.
6 Featherstone, T., ‘Taking a shareholder on board’, Company Director, September 2012.
7 Under s 206B of the Corporations Act 2001 (Cth), an individual is automatically disqualified from being a director if they have been convicted of certain types of offences. These include offences involving
dishonesty which are punishable by at least 3 months imprisonment and offences involving a contravention of the Corporations Act which are punishable by imprisonment for greater than 12 months.
8 Under s 206C of the Corporations Act 2001 (Cth), the court may disqualify a person from being a director if the person has breached certain provisions of the Corporations Act and the court is satisfied that
disqualification is justified.
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.