Indications so far this Australian proxy season (similar to recent UK experience) are that investors may be more inclined to oppose the election of directors to boards than in prior years.
The “red flags” to watch for are the extent to which a director is:
- “over-boarded” with too many other commitments
- chairman of a board or remuneration committee that has overseen too many poor remuneration practices
- chairman of a board with a poor governance record
- chairman of a board with a poor performance record.
Investors and proxy advisers consider the composition, skill set and experience of boards to inform their director election decisions. Guerdon Associates’ surveys on board effectiveness consistently rate the depth and breath of director skills and experience, and the alignment of those skills with the company’s strategy, as ‘most important’.
Some directors, however, remain uncertain about what proxy advisors and investors expect of them in relation to discussions around board skill-sets and board renewal. How much detail should they be prepared to discuss with investors about their plans for renewing their boards? How should they best prepare for such meetings?
In our experience, the chairmen of leading companies put a great deal of time and thought into renewing and reshaping their boards and, accordingly, are extremely well prepared for any questions put to them by investors or proxy firms. In order to move from ‘good’ to ‘great’, they are prepared to actively bring about the replacement of underperforming directors with candidates whose skills are better aligned with the company’s strategy and who can deliver greater value for shareholders.
Here are some pointers to help chairmen prepare for discussions about board renewal with the external market:
1. Consider the skills and experience required – now and in the future
In an ideal world, if you were starting with a clean slate, who would you need on your board? Start by considering your company’s strategy and vision for the future, and think about the kinds of people who could add the greatest value. What skills would they bring, and what kinds of backgrounds or experience would they have? What ‘soft skills’ would you ideally like to see on your board, particularly those necessary to deliver a positive and constructive board culture and dynamics?
A board evaluation can assist with this process, using input from directors and executives about the skills and types of experience that they believe is desirable.
2. Honestly assess skills and contribution of current directors
Conduct a candid appraisal of the performance and contribution of directors. Who is really contributing? Who asks the questions that ‘get to the heart of the matter’? How do directors use their skills in board meetings or strategy sessions to deliver value for shareholders? The fact that a person possesses a particular set of skills or experience is less important than the way they make use of these skills in the boardroom.
3. Identify any gaps
Once you have considered the skills you need for the board in the future and assessed the current skills and contribution of directors, you can identify areas where there may be gaps.
4. Plan your meetings
Proxy advisors recommend that companies first meet with institutional investors prior to meeting with them. Investors are very interested in hearing about the board’s plans for future renewal, particularly if the board consists of several long-standing directors where independence may be compromised.
In planning your meetings, investors and proxy advisors will expect you to discuss the skills you would like to bring on to your board, if and when there is an opportunity to appoint additional directors. This discussion can be quite high level and does not need to cover details such as timing or numbers of new directors. Investors will also be seeking to understand the rationale for board renewal, and how the new directors and the skills they bring will benefit shareholders.
Companies that proactively engage with the external market give their shareholders confidence that the board is responsive to changes in the company’s strategy and direction, and that there is a commitment to making changes that are in the best interests of shareholders.© Guerdon Associates 2023 Back to all articles