A checklist for developing a board skills matrix that will withstand public scrutiny
25/11/2013
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Investors, ESG raters, and proxy advisors have shown increasing interest in board composition and, more specifically, in ensuring that the companies in which they invest have the breadth and depth of board skills to enable adequate oversight of the business, both now and in the future. To an extent this interest will only be partially satisfied by new ASX Governance Principle on director skills matrix disclosure (see HERE).

Boards need to retain control of this process. There have been recent examples of companies receiving unsolicited approaches by credible and apparently well-qualified candidates self-nominating for election to the board. For example, we have seen an individual with expertise in climate change presenting as a candidate to assist a resources company position itself for global regulation and alternative energy sources.

So how can companies better prepare for this type of scenario? What should they do to guard against such unsolicited approaches and to convince investors and proxy advisors that they have the right mix of skills, experience and diversity for the future, given the company’s geographies, customers, investors and strategy?

It is suggested companies need to develop a good process for identifying the skills they need, both now and in the future. This process should be:

  • Robust
  • Defensible
  • Logically determined
  • Tied to strategy

Investors need to be assured that the board has thoroughly and systematically given thought to the future skill and diversity needs of their boards, and has not overlooked any important areas. As in the example above, the investment community would want to be assured that the board skill implications of future scenarios (such as climate change scenarios) had been thoroughly explored by the board. Below is our checklist for achieving this.

1. Analyse skills/experience required to deliver on current strategy

The first step in developing the board skills matrix is the review of the company’s strategic plan. Start by writing down each of the strategic priorities or objectives, and think about the knowledge, skills, competencies, alliances/relationships required to achieve these strategic objectives. Don’t worry about whether these skills need to be represented at board or executive management level – that will be decided at a later stage of the process. Think, too, about your vision for the future – what kind of board with what kinds of members will be needed to help steer the company in the direction of the vision?

2. Identify current issues, and skill needs

Secondly, think about the key issues or challenges currently facing the business. Write down the top half dozen, and then consider what skills or experience will be needed to most effectively deal with each of these. Examples of current issues could include relocation, downsizing, making or integrating an acquisition, getting a new product or service to market, etc.

3. Consider future scenarios

Next, think about your company’s next big strategic ‘leap’, beyond the scope of the present strategic plan. Think about what the most optimistic future scenario could look like – the ‘Optimistic View’ scenario. Under this scenario, your organisation could be planning diversification, acquisition and growth. Think about the skills, knowledge and competencies needed for success under this scenario, and make a note of these requirements. Think too, about the most negative possible outlook – the ‘Hard Times’ scenario. Your business may need to consider divestment or contraction, merger, rationalisation or restructure. Consider the skills, knowledge and competencies required under these conditions.

4. Assess and prioritise skill and experience requirements

Your list of skills, experience, knowledge and capabilities developed from steps 1 to 3 is likely to be quite long, so this step of the process involves identifying the most important requirements for the board and the organisation. You might look at your list and feel that everything on it is important! In order to work out the top priorities, rate each item according to its level of risk and opportunity, and strategic importance using a 3-point scale (i.e. High = 3, Medium = 2, Low = 1, and Not Applicable = 0). Some guiding questions may also be useful to help you assess priority skill areas:

  • Is this skill set ‘mission critical’ for our business?
  • Does this skill help us to mitigate a key risk?
  • Will this skill help us move in the direction of our vision?
  • Will this skill help us deliver our key strategic objectives?
  • Is this skill in short supply, highly specialised or unique (as opposed to skills that are possessed by many on the board or in the organisation)?
  • Is this a skill we will need in the short, medium or longer term?

5. Decide where skills are needed

 For each skill or experience type, it is important to determine whether the skill needs to be represented on the board, within the management team, bought in, or some combination of the above. You may decide to conduct this exercise together with members of your nominations committee, or even as a whole of board exercise. This is a useful way to build engagement in the process of board renewal.

6. Assess current board skill set against priorities

Using the 3-point scale above, consider whether the current board possesses the skills that have been identified as high priority. Areas where there are gaps are identified as recruitment opportunities.

7. Review of individual director skills against board skill requirements

You are now in a position to construct the Board Skills Matrix document, using the data that you have gathered from steps 1 to 6. The skill and experience requirements for the board are included in the first column, with remaining columns containing the name of each director. Your matrix can also include the names of any candidates you are considering for board roles.

In conclusion, it is clear that this process for developing a board skills matrix meets the criteria outlined above. It is directly tied to the company’s strategy and future strategic scenarios, it is developed using a methodical and logical approach, and it is robust, in that it has all of the foreseeable bases covered. Such a matrix could be confidently used by a company to guide its board selection decision-making, and succession planning in the future.

© Guerdon Associates 2021
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