Australian board of directors and executives discussing business opportunities and long-term business performance and sustainability.
In the rapidly changing business landscape, risks are multiplying. Corporate culture , cybersecurity and digital developments are just some of the issues involved in the process.
Undertaking regular and robust board skills assessments helps you to navigate the future.
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Is a directors skills assessment required?
In Australia, the expectation for listed companies to have and disclose a board skills matrix is established by the ASX Corporate Governance Principles and Recommendations . According to recommendation 2.2:
“Aplate entity should have and disclose a board skills matrix setting out the mix of skills that the board currently has or is looking to achieve in its membership.”
Departure, which was introduced five years ago in the previous iteration of the principles and recommendations. The fourth edition, launched earlier this year, includes an additional commentary on the board’s skills matrix, in particular:
- Should address both existing and emerging business and governance issues.
- Can focus on the board’s current or desired skills, or both .
- Is useful to define each skill and the criteria for having it.
Notably, the new guidance stops short of specifying the matrix’s content or form, which was proposed for the earlier consultation draft.
The final report from the Financial Services Royal Commission notes the importance of addressing the skills held by boards:
“ The greater the need for board skills, the more pressing it is for nomination and appointment processes to Recognize Those needs Expressly. And the more pressing it is for boards to make effective provision for regular and orderly board renewal and replacement. “
What does a board skills assessment achieve?
Boards of all types of organizations, from private companies to public sector entities and non-profits, can benefit greatly from regularly assessing their skills.
At its best, the board skills assessment is a powerful link between an organization’s directors, its present values and its future direction.
It also assists boards and businesses with:
- Succession planning – Determining the new skills to be used as part of the ongoing renewal process.
- Performance review – evaluating the board of directors against their specific skill sets as well as on an overall basis.
- Board development – establishing focus areas for briefings and training to broaden or deepen specific skills and maintain up-to-date knowledge.
Six questions to guide the board’s assessment skills assessment process
When it comes to board assessments, the old adage of ‘start where you are, use what you have’ does not always hold true.
Taking an assessment of the expertise and experience around the boardroom as a basis for the skills assessment.
Instead, start with the twin peaks of the organization’s strategy and its key risks.
- What skills do we need?
Some skills, such as strategy development and financial acumen, are part and parcel of every board. While their presence can almost be guaranteed, their importance should not be overlooked.
Other skills will depend on the organization and its environment as well as experience in highly regulated industries, customer engagement, or innovation.
Finally, boards may seek to navigate some of the challenges. For example, experience in implementing widespread cultural change, expansion into developing markets, or mergers and acquisitions may be particularly relevant.
- What depth of each skill do we need?
Does a director qualify as having a skill as a non-executive director on other boards, or are practical application and proven results in a management or advisory capacity necessary?
Financial and legal expertise require professional qualifications and experience in complex issues. On the other end of the spectrum, many boards consider directors’ skill in governance based on their demonstrable commitment to good practice.
- What breadth of each skill do we need?
How many members of the board should possess each skill? Some skills may be desirable for all directors, such as relevant industry experience, while others may be sufficient.
Robust and well-informed debate from a range of perspectives and support effective oversight of management.
- What is our current skills profile?
Mapping the desired skills against the board’s existing composition can be approached as a group discussion among directors, but the risk that diplomacy may override objectivity should be considered.
Preparation in advance can help steer a group discussion. Directors of the board can complete a self-assessment of their skills, an assessment of each of their peers (typically anonymously), or both. By the company secretary or the chair, as a basis for further consideration by the board or a nominated committee.
- Where are our gaps?
The board’s self-assessment may identify areas where new skills are needed, or a desire to enhance their existing skills by deepening or broadening them in some cases.
Where there are opportunities to strengthen the skills on the board, the top priorities should be identified. This involves a balance of their relative importance and urgency.
- How do we close those gaps?
Developing a plan to address any gaps in the board’s skills is essential for the process to be more meaningful than a mere compliance exercise. It does not automatically appoint a new director. Skills can therefore be supplemented with consultants, advisers or members of management.
If planning is long-range, it can guide the overall renewal plan and identify emerging needs while maintaining stability and knowledge on the board.
Diligent’s Board Assessment tool can help streamline the process of evaluating the skills on your board. As part of Diligent’s Governance Cloud, it’s a secure solution for highly sensitive board information, insights and communication.
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