The 2014-2015 year heralded the introduction of a Board skills matrix to the disclosures of many top Australian companies.
Recommendation 2.2 of the latest ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations delineates that a listed entity should have and disclose a board skills matrix that sets out the mix of skills and diversity the Board currently has or is looking to achieve in its membership. This may include:
• Executive and Non-Executive experience;
• Industry and sector experience or knowledge;
• Strategic thinking;
• Desired behavioural competencies;
• Geographic experience;
• Subject matter expertise; and
• Other factors relevant to the particular company.
The process of creating the skills matrix is valuable as a means of reflecting on:
• whether the Boards’ skill set is aligned to company strategy and industry or whether there is presently a skills deficit on the Board; and
• whether there will be a gap in the future as circumstances change.
Disclosure of the skills matrix is not compulsory – the Corporate Governance Principles and Recommendations operate on an “if not, why not” basis. Yet the majority of ASX 100 companies disclosed a skills matrix in 2015.
These were generally made available in the companies’ annual reports, although some were included in a separate corporate governance or financial statement. There is no prescribed document in which to disclose the skills matrix, however, governance experts generally expect that it will be included in the annual report.
It is open to the Board to determine the most appropriate form and presentation of the skills matrix, with variations including:
• A list of skills without any disclosure on the skill’s prevalence on the Board;
• A list of skills and disclosure at Board level and the number of Directors possessing those skills; and
• A list of skills and disclosure at Board and Committee level on the number of Directors possessing those skills,
potentially accompanied by a narrative clarifying areas of focus, future directions or particular skill sets brought by new additions to the Board.
The level of explanation provided for each skill also varied from company to company. Some companies described the attributes required for a Director to possess the necessary skills, while other disclosures only noted the skills as key words in set out in a table or short paragraph.
The most useful skills matrices are more detailed and clearly linked to the Board’s strategic objectives. Instead of stating that Directors have “industry specific experience”, for instance, BHP reveals the number of Directors in each committee with “experience in a large mining organisation combined with an understanding of the Group’s purpose to create long-term shareholder value through the discovery, acquisition development and marketing of natural resources”.
The following are three examples of companies that provide a description of the skills as well as the level of each skill present on the Board:
Information that is market sensitive or otherwise confidential, for example information related to growth strategies or current challenges that the entity is facing, need not be made publicly available. Most companies have avoided disclosing such information by revealing only those skills that are currently represented (as opposed to those that will be desirable in the future) or providing a summary of the skills matrix. In these cases, the Board could consider providing an explanation of the review process or the process that the Board has undertaken to develop the skills matrix.
However, the appropriate level of disclosure will depend on the company’s circumstances. A company in a particular life cycle stage or market may need to be more precise in its disclosure, particularly in regard to skills gaps. For example, a resources company might outline its plans to ensure Directors have the necessary skills to deal with the mining industry’s transition from an exploration and construction phase into an operations and global marketing phase.
Overall, the skills matrix should indicate that the Board has given enough thought to its present and future capability requirements. In some cases it may be sufficient to explain the process that the Board undertakes where a need or gap in skills is identified (for example, appointing external search consultants), which increases shareholder confidence in the Board’s ability to mitigate risk.
It is important that the completion and disclosure of the matrix does not become a box-ticking exercise, but truly strengthens the Board’s renewal efforts. Egan Associates’ tips for creating an effective Board skills matrix can be found here.