The challenge of disclosing your board’s skills profile
The success of a company relies on many factors. One of the most important is unquestionably, the quality and capabilities of its board of directors. After all, it’s the board that oversees the company’s all-important strategy as well as performance and sets the risk appetite. To be up to these tasks, the board must have the skills to steer the company through an ever-changing business environment and the insights to make the right strategic decisions even in challenging times.
A board skills matrix is an important tool
Boards attuned to their stewardship responsibilities understand how a board skills matrix can be an important tool to ensure the board’s skills are aligned with the company’s strategy and purpose.
The creation of a skills matrix is an opportunity for the board to reflect on how it is currently constituted and also to clarify its thinking on how it should be constituted to meet strategic goals.
Lack of IT savvy boards is a challenge for today’s companies
Take for example, the importance of IT skills at board level. For a long time, IT was considered an operational matter best delegated to management. Traditionally, there has been a premium on directors with industry experience or those hailing from the legal or accounting fields. But the era of digital disruption has upended those assumptions. Thanks to the dramatic failures of former corporate giants such as Kodak, Nokia, Borders and Blackberry, directors today are acutely aware that technology is no longer an afterthought, but a core driver of business innovation and, in many cases, survival in a brave new tech-enabled world.
But for every failure, there’s also a spectacular success story of companies with the foresight to anticipate and capitalise on technological changes. Examples to look at include Amazon, which spearheaded and continues to be a leader in online retailing, or Domino’s Pizza, which has become the fastest growing company in the pizza industry through new technologies such as ordering and order tracking through Facebook and iPhone apps, as well as launching 3D pizza creation by customers.
Australian companies are getting the message
The board renewal process at Australia’s top banks reveals that the finance sector has gotten the message. Just this year, National Australia Bank and the Commonwealth Bank both appointed senior technology leaders as non-executive directors. In making these appointments, both NAB and CBA would have been guided by a board skills matrix that had identified IT skills as a key gap.
Creating a skills matrix is straightforward enough — disclosing it is not
Uncontroversially, the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations affirm that creating a board skills matrix is good governance practice. However, the challenge lies in the accompanying recommendation that listed entities go a step further and disclose the skills matrix or a summary of it in their annual report.
This is the conundrum: the company has done the responsible thing and gone through a process of identifying the lack of a key skill on the board — yet how does it disclose that gap without suggesting the current board is ‘not up to scratch’?
Disclosing the skills matrix is intended to give investors confidence that the board has thought hard about the mix of skills needed to properly supervise the business. But there’s a tension between the transparency needed to give investors insight into board thinking and the need to ensure that the disclosure of any skill gaps does not reflect poorly on the company.
Here are some issues to consider when treading this fine line:
- Disclosure of the skills matrix is only recommended for listed entities. Unlisted entities need to decide if disclosure brings benefits to members.
- The ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations do not prescribe the format of the skills matrix to be disclosed. Companies should therefore decide which elements of the original skills matrix should be made public, and whether disclosure should be in narrative or table format, or a combination of both.
- Companies should consider whether disclosure of a skill gap should be accompanied by an explanation of why the existing skills mix is nevertheless adequate.
- Consider the level of disclosure appropriate for the company’s circumstances. For example, a company in a particular life cycle stage or market may need to be very precise in its disclosure of the board skills sought, in order to address investor concerns.
Ultimately, identification of inadequate skills in one area does not of itself indicate a dysfunctional board. Rather, it should be viewed as a positive, as it shows the board has actively considered which skills will add most value to the entity.
What’s your experience of board skills disclosure?
For more information, refer to Governance Institute’s Good Governance Guide: Creating and disclosing a board skills matrix.