Board skills matrix: Building an effective board of directors
Board refreshment is a top concern for shareholders, especially when companies aren’t performing at their best, which is why board skills matrix exist.
Shareholders want to understand the process behind board refreshment, so they have assurance that the board of directors has the best-qualified and most diverse composition possible. In response to shareholder concerns, effective boards should be prepared to assess their board’s composition. They should know how the board’s composition relates to the organization’s strategies and future vision and be prepared to back up their understanding with a robust board performance assessment and solid succession plan.
Effective board self-evaluations pave the way to fill in the blanks of the board skills matrix. Those who serve in these positions set the tone and culture of the board regarding the performance assessments and board refreshment processes that serve the organization, management and shareholders.
The best way to refresh the board is through succession planning and cultivating candidates. Boards that disclose the steps to their shareholders, so that they understand the process, are less likely to have those shareholders become activists. With Diligent Corporation’s Nominations and Governance tool, you can facilitate this process.
Board Skills Matrix: The Board’s Perspective on Board Refreshment
While most effective board directors understand that they need to keep their boards refreshed, on the whole, their actions aren’t matching their knowledge. According to PwC’s 2018 Annual Corporate Directors Survey:
- 45% of directors believe that at least one person on their board must be replaced
- 21% of directors feel that more than one director must go
- 12% of directors say their board peers lack the appropriate skills and expertise
- 10% of directors say the advanced age of their board peers has negatively impacted their peers’ performance
Institutional Shareholder Services states that the tenure of the average board director is 8.6 years. Given the complexity of duties for board directors, most believe that this is a reasonable period of time. As boards pursue board refreshment, they need to consider the average tenure for board directors, the range of tenure, board size and committee structure. Among some of the things on a board skills matrix should be the following categories:
- Skills
- Expertise
- Experience
- Age
- Gender
- Compensation
- Ethnicity
- Race
By using benchmarks for companies that are similar in size, industry and scope, boards can create context to help identify shareholder concerns. Shareholders get concerned about board refreshment when they perceive that the board is having difficulty in overseeing strategies and risks. Boards are wise to take an ongoing approach to effective board refreshment and developing succession planning practices to meet evolving needs. The gaps in the board matrix are the keys to creating a well-composed board of directors.
Board Self-Evaluations Set the Stage for Succession Planning
Board self-evaluations are the first step in succession planning. The board has to know what its skills and talents are before it can determine whether the current composition is appropriate or whether there are areas where the board is lacking.
Since the average board director tenure is just under nine years and boards should be engaging in long-term strategic planning, it only makes sense that boards should be setting up the board composition to meet the needs of the future. Some boards are mandated to do annual succession planning and to provide disclosures about board composition to their shareholders.
The expectation is that the board will evaluate the board as a whole. While whole board evaluations tell part of the story about board performance, it’s helpful to do individual board director assessments at some point. Individual director evaluations can reveal enlightening results and identify missing capabilities on the board.
The easiest way to get a complete picture of the board’s current skill set is to map board directors and/or board candidates on a matrix. The gaps reveal areas of board weakness and deficits. The gaps in skills are obviously the skills that succession planning committees should be looking for during board director recruitment activities.
Succession planning is a process in which nominating and governance committees are continually working on being informed about the potential to bring new talent to their boards.
Overall, succession planning leads to long-term success and sustainability. Nominating committees that continually search and work to cultivate talent from within the company will keep a steady stream of potential candidates in the pipeline should there be a need to replace a director or add a director to the board. Another benefit of succession planning is that it develops long-term careers for outstanding employees who are looking for advancement.
Secure Board Management Software Integrates Applications for Succession Planning
Shareholders aren’t necessarily privy to every detail about board director candidates. In their role, they should expect to receive disclosures about the principles, policies and the process that boards use to select candidates. Succession planning keeps a qualified list of candidates in the pipeline, which leads to long-term success and sustainability for companies.
Where do succession planning committees get all the details to enter into the board skills matrix? Diligent Nomination and Governance is a secure digital tool that provides the answers to who board director recruits are and how well-qualified they are. It gives them the same information that proxy advisors, shareholders and activist investors rely on and it sets the stage for good corporate governance practices.
Nomination and Governance pulls up the largest global governance data set of board candidates. With over 125,000 profiles to view, succession planning committees can gain insights into the board’s composition, benchmark against the competition and bolster their executive search. The tool finds the shortest path to connect with candidates and the degrees of separation between organizations and people. The database includes information from over 5,500 companies across 24 global markets and 40 indexes. The search tool makes easy work of the candidate search with granular filter options for experience, demographics, region, sector and discipline. The tool also breaks down candidates by gender, age, director interlocks and overboarding — the same issues that concern shareholders. These are the details that help to complete your matrix so you can gain insights into the candidates’ strengths and weaknesses and compare the board’s composition to that of its peers.
