Recent press comment and statements made in response to the Hayne Royal Commission have reinforced observations from investors, proxy advisers and others that Boards need to be more transparent and provide more comprehensive information on their nominations process and Director capability.
In our opinion, a proportion of both favourable and unfavourable comment in relation to the composition of Boards across all sectors arises from shortcomings in the corporate governance statement and annual reports of many organisations. These shortcomings relate to failing to appropriately outline the capabilities essential for effective Board stewardship and the skills and experience of each member of their Board and those who are presenting themselves for election.
As awareness of a Boards’ obligations becomes more widely discussed and addressed, much of the controversial comment should be substantially reduced.
The Australian Institute of Company Directors (AICD) has regularly published articles which flag the criticality of these issues. In one such article (see an edited extract from the book Developing Your Director Career) by Elizabeth Jameson, the author reflects on the Components of a Balanced Board which come down to 4 main components:
- SKILLS – Boards asking what hard skills and qualifications do we need amongst our Directors
- EXPERIENCE – Boards asking what practical experience do we need amongst our Directors in terms of a track record in relevant fields
- DEMOGRAPHICS – Boards asking what sort of balance of age, geography, gender, ethnicity, culture, faith and other demographic attributes do we want in order to bring a sufficient diversity of views and styles of thinking
- PERSONAL or BEHAVIOURAL ATTRIBUTES – Boards asking themselves what type of behaviours (commitment, dedication, strategic thinking, integrity and team player ability) do we want amongst our Directors
These four components should be reflected in the Board’s approved skills matrix or Board composition matrix reflecting the fact that what Boards seek is much more than hard skills and qualifications.
In the extract, the author comments on the skills, experience, demographic, personal and behavioural attributes which are likely to have a relevance in this process. While the extract presents a comprehensive checklist, what one Board would regard as relevant skills in finance and accounting or information systems, data analysis and cyber security or legal skills, another may see as inadequate.
Accordingly, it is our view that rather than adopting a process which is the most common of a one to five word statement in relation to skills or experience, it is important for the statement to be comprehensive in order that shareholders have a more thorough appreciation of the matters which the Board believe to be critical in fulfilling its role.
The AICD extract also highlights interesting observations in relation to demographics and personal and behavioural attributes. Among the latter we were interested to observe, among many, personal or behavioural attributes considered desirable. They included:
In light of the Hayne Royal Commission where the primary focus was on those organisations in the financial services sector, many of the issues arising have a much wider relevance. Capability requirements, in this context, while having a number of universal attributes, will also have attributes which are specific to the organisation’s scale, its internationalisation and the industry in which it both operates and competes.
Of increasing significance and questioning, following commentary over the past 12 months, is the criticality of the customer, the integrity of the relationship and how Boards maintain a familiarity with the organisation’s policies and practices and embrace that understanding in their assessment of management’s contribution to the organisation’s sustainability and reputation.
While discussion in relation to these issues will continue, it is our opinion that of critical importance is a more transparent disclosure of Director capability and the relevance of that capability to the organisation’s attributes.
Clearly, these disclosures and reviews should cascade down through the leadership team of the organisation with some reassurances given to provide shareholders with confidence.
This dialogue is also leading to market observations by regulators, investors and Directors on the criticality of measuring management’s contribution to the organisation’s performance and sustainability outside the more widely used financial metrics of shareholder return and earnings.
In reviewing corporate governance statements and annual reports over the past 12 months, we observed a high degree of commonality across industries among Australia’s leading companies. This commonality relates to the attributes and capabilities which they seek in ensuring that their Board collectively have the right blend of knowledge and experience and personal attributes to ensure the effective stewardship of the organisations where they are representing significant shareholders.
In reviewing the capability requirements that are being increasingly reflected in a Board’s engagement in both renewal and retention of Directors, we reviewed the statements of the nation’s leading financial institutions, organisations involved in the health and the pharmaceutical sectors, the consumer sector, including consumer discretionary, the mining, energy and industrial sectors and media.
Excluding industry specific experience, the following list (ordered alphabetically) highlights the most common capabilities being sought at Board level.
- Capital projects / material transactions
- Executive / Board experience
- Financial acumen
- Health and safety
- Information technology/ digital / cyber security
- International Experience
- Investment, M&A and entrepreneurship
- Judgement and Problem Solving
- Legal and regulatory
- Manufacturing / Supply Chain
- People, culture and conduct
- Public policy
- Remuneration and succession
- Risk management and compliance
- Sales, market and customer knowledge
- Science and technology
- Sustainability and environment