Boards to test their own competence annually

A number of the proposed changes to the ASX Corporate Governance Principles and Recommendations (see HERE) are nudging boards to take more accountability for the experience and performance of their directors and how those individual directors contribute to the board as a whole.

Three key changes appear to respond to investors’ relatively recent preparedness to vote against director elections at AGMs, putting the emphasis squarely on director skills and their contribution to board functioning.

  • Recommendation 1.6 – Board reviews are to occur annually rather than periodically. In the commentary, the Council adds that “particular attention should be paid to addressing issues that may emerge from that review, such as the currency of a director’s knowledge and skills or if a director’s performance has been impacted by other commitments”. Further, the council has strengthened its wording in the commentary suggesting that companies disclose any insights gained from such review. Not surprising given so few companies (only one 200 ASX company based on Guerdon Associates’ research) have been taking any notice of this suggestion in the prior version.
  • Recommendation 2.2 – The commentary under the board skills matrix has been rewritten, suggesting two main formats to be used – a) current board skills required and the board’s possession of those skills as a whole b) the skills the board is hoping to achieve. The former would normally be a table and the latter a statement.
  • Recommendation 2.6 – This recommendation now includes the requirement that boards periodically review whether directors need to undertake professional development to maintain the skills and knowledge needed to perform their role as directors. In the commentary, new issues such as culture, conduct risk, digital disruption, cybersecurity, sustainability and climate change were pinpointed, along with more traditional skills such as audit or legal frameworks.

If boards are not considering the competence of their members, the ASX Corporate Governance Council obviously thinks they should be. And it seems clear that a required annual board review will be key to the process. And that review is not to be an informal chat between the chairman and directors, but a more formal, hard-nosed look at performance both individually and as a whole.

Guerdon Associates conducts board reviews. Sometimes we find that there is resistance to assessing directors as individuals – the concern is that negative assessments could cause tension within the board.

However, in our experience, when a review involves rigorous planning and is conducted using anonymous responses and there is room for improvement, responses are generally constructive and insights can lead to significant positive changes. There is no need for the concern that some directors feel about the process.

Indeed, the most effective reviews we have facilitated take the process a step further. It is difficult for directors to objectively assess how their skill sets meet the requirements of the company as they are too close to the matter. When board reviews include additional (anonymised) input from management with exposure to board functioning , it has led to an assessment of skills gaps that better reflects the true needs of the company.

More boards could try  this.  If in doubt, consider an external facilitator.

From now it will be at least a matter of compliance, and hopefully more than this. And if boards do not assess the performance of their directors, it seems investors are more ready to do it for them at the next AGM.


© Guerdon Associates 2024
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