Most Boards develop a capability matrix to track the composition of the Board and to assess how well it is equipped to deal with the future. Ensuring the Board enjoys optimal access to relevant experience and skills is a vital area of human capital risk management.
A well thought out capability matrix will ameliorate risk. It guides recruitment, succession and individual Director development, and provides confidence to external stakeholders that the Board has an appropriate focus on improving its own performance and development. A hastily constructed matrix on the other hand might lead to superficial confidence in the Board’s capabilities while hiding the absence of critical skills.
Below are our top tips to build and implement an effective Board capability matrix:
- Align the matrix to the organisation’s strategic imperatives.
Determine those critical capabilities that will significantly enhance organisational performance as the strategy unfolds. For example, a not-for-profit organisation in today’s crowded fundraising market might emphasise business networking, social media and direct fundraising experience. A listed entity competing in a highly competitive fast moving consumer goods market might look to product innovation. An energy or resources company might emphasise exploration experience in different geographies.
- Avoid “entry-to-the-game” capabilities.
Avoid generic sets of skills that provide little added value as they represent threshold capabilities demanded of any Director. For example, here is a list of the capabilities that BHP assumed common to all its Directors, which was published in its 2013 annual report:
- Unquestioned honesty and integrity;
- A proven track record of creating value for shareholders;
- Time available to undertake the responsibilities;
- An ability to apply strategic thought to matters in issue;
- A preparedness to question, challenge and critique; and
- A willingness to understand and commit to the highest standards of governance.
- Differentiate capability requirements for the Board and the Chair.
Separate the capabilities required of the Chairman from the rest of the Board, as there are specific leadership demands on the Chairman role that deserve separate mention. For example, not everyone on the Board needs to have the capabilities necessary for relating to external stakeholders, interacting with State and Federal Ministers or leading M&A negotiations. Clarifying the leadership capabilities desired in the Chairman often provokes a useful and robust discussion in the Boardroom about who ought take the lead on matters such as those mentioned above.
- Focus on each Committee separately.
Ensure each Committee is well represented with the capabilities required across the entire Board as well as the demands of that specific Committee.
- Test the matrix against eventualities.
Consider a range of future scenarios to ensure the Board capability matrix is flexible enough to permit inclusion of capabilities that will become important depending on what happens to the organisation in the future.
For example, a “full steam ahead” scenario might require business acquisition and merger capabilities while an “avoid sinking” scenario might demand cost containment, customer retention, and cash flow capabilities.
- Question where to source each capability.
Boards should consider carefully whether capabilities are best addressed by seeking them at Board level, management level, or both, or whether specific capabilities might be best sought externally.
- Target Director development.
Your first matrix might represent a checklist only: that is, do Directors have the identified background and capabilities or not? This will help highlight any current or future gaps in Board requirements.
Your next revision, however, should include the ability to rate individual Directors on each of the required capabilities so that each Director can benefit from personalised professional development.
- Communicate goals and progress to stakeholders.
As external stakeholders place entities under increasing focus, the need to be proactive in demonstrating that the Board is cognisant of and flexible enough to deal with any challenges and opportunities is vital.
Maintain and present a set of statistics in the annual report that show diversity elements such as experience, tenure, geographic location, gender, race, age and any other dimensions specific to your entity.
- Review the capability matrix.
The Nomination Committee should review the Board capability matrix at least annually to help:
- Highlight opportunities to rotate Directors through Committees to broaden their experience and value to the Board;
- Identify specific gaps that demand immediate or staged recruitment;
- Plan succession in an orderly way; and
- Confirm that the elements embedded in the matrix remain highly relevant to the demands of the organisation and the external world.
As with any Board task, completing a capability matrix is only worth doing if it is done well. Although these tips provide a good baseline for Boards to successfully implement a capability matrix, attaining the necessary objectivity to identify which capabilities really make a difference in the organisation and gauge whether the Board possesses them can be difficult. Egan Associates offers Board capability services to highlight the deficiencies and opportunities for improvement that even effective Boards miss.