Complex decision-making demands a laser focus on the composition, skills and experience of board members. Here, we look at the challenges and benefits of building a skills matrix that is fit for purpose.
The complexity of decision-making in the current operating environment places a great cognitive load on directors. As such, tailored board composition — and the bespoke skills of those at the table — has never been more vital.
Over the past decade, board members and nomination committees have grown accustomed to documenting and disclosing the competencies and skills of their board, and it has come to be expected by investors and regulators.
A well-constructed skills matrix helps a board identify the nature and depth of the skills around the table, as well as gaps that need to be filled. It supports succession planning and provides valuable insights for investors and other stakeholders.
“We are seeing a swing away from shareholders as the main stakeholder towards customer fairness, corporate responsibility, ESG and the like,” says Mark Joiner, PEXA and TAL Group chair. “The basic matrix needs to reflect the mood of the times.”
It can be “generic”, he says, “but to some degree it must also be populated with factors that reflect the organisation’s particular strategic priorities and possibly purpose or values. For example, digital marketing, data analytics, international expansion, customer engagement. This can be hard to do, but yields more insight around whether a board is properly constituted for coming challenges.”
Robin Low FAICD, a non-executive director of Guide Dogs NSW/ACT and Australian Securities Exchange (ASX) listed companies Appen and IPH Limited, says that while the skill set required of directors continues to broaden, there’s also a need for unique skills. “Part of the skill pressure is increasing governance requirements, with new sustainability standards, ever-present cyber risk, remuneration complexity, shareholder activism... the list goes on.
“And while you want directors with the relevant skills, it is also important for directors’ [skills] to be broad, as they need to be across all aspects of the business,” says Low. “This is part of what a skills matrix helps you understand.”
There are core competencies a board relies on for longevity, emphasises Low. “Industry experience remains vital — not for everyone on the board, but the more complex the industry, the more important it is to have directors who deeply understand the industry environment, risks and opportunities.”
She adds: “I would argue that while directors [will] tick the skills matrix boxes at different levels of expertise, you want most directors to have capability in every box.”
Great expectations
“We’re seeing rapid changes in technology, business models and regulation, as well as the consequences of geopolitical volatility,” says Cynthia Cottrell, the leader of Mercer Pacific’s workforce consulting and products business. “There can also be rapid change within an organisation as it moves through different phases.”
Mercer Pacific has advised ASX 200 companies on various skills initiatives. “A skills matrix allows the board to revisit its assumptions about what’s needed to guide the organisation into a very different future,” she says. “You need to understand the skills that will take you from where you are now to where you need to be.”
From an investor perspective, the Australian Shareholders’ Association (ASA) says: “boards should comprise directors with diverse skills as required to fulfil the company’s strategic plan. The required skills and accredited skills attributed to each director should be communicated in a board skills matrix, which supports the shareholders’ decisions on voting for a director’s election or re-election.”
“We consider each board member’s skills and how these complement each other,” says ASA CEO Rachel Waterhouse. “We also look for a few specific capabilities. For instance, we want to see at least one board member with cyber skills.”
However, she adds, “Today’s boards are expected to cover a huge number of items in a meeting and the list is continuing to grow, so the requirements can’t be too granular or you could easily end up with 20 or 30 skills on the list.”
The importance of authenticity
The ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations state that listed entities should disclose a skills matrix that sets out the mix of skills a board has, or is looking to achieve, in its membership.
The principles advise that boards should take care to explain to investors what it means when it refers to a particular skill and the criteria a director must meet to be considered to have that skill.
A skills matrix increases the accountability of a board, ensuring it has the expertise to add value and meet its obligations. But there is no prescribed format and the quality of information varies considerably. “Authenticity is critical, so better disclosure in annual reports is absolutely required,” says Waterhouse. “Some companies report on the board as a whole, rather than individual directors, while others de-identify.”
Many report that, “all board members are very skilled in multiple fields,” adds Waterhouse. “We’re more interested in the two or three areas where directors’ skills levels are high enough to contribute real value. We’d like companies to consider whether they’re communicating effectively enough to provide the information retail shareholders need.”
Some companies are concerned that a more complete disclosure of the skills matrix could signpost a change in strategy or problem areas, but the principles exclude the disclosure of commercially sensitive information as part of its recommendations.
Depth vs breadth
When assessing board composition, an attribute rating scale provides a more nuanced understanding of the collective capabilities than a binary yes/no evaluation, says AICD Boardroom Mastery facilitator James Beck GAICD.
This approach allows for a more precise measurement of the degree to which the board possesses the desired skills, experience and backgrounds. It also facilitates the identification of skills gaps, which can be critical to determining whether these deficiencies can be remedied through professional development, or if new recruitment is necessary.
For instance, in evaluating accounting skills, directors wouldn’t just indicate whether they have such skills. Instead, they’d rate their proficiency on a scale — perhaps from “basic familiarity” to “expert- level knowledge”. This helps to highlight areas for improvement and potential training opportunities.
The process must be standardised to ensure consistency and reliability. Each director’s evaluation should adhere to the same criteria and be subject to review — potentially by a company secretary or another appointed representative — to verify accuracy and maintain fairness, says Beck. Joiner “despairs” at some directors’ uninformed “ticking” strategy. “I’ve seen scoring systems that rated 1-2-3 against skills, and only get reported externally on an aggregate basis so as not to embarrass anyone”.
Any gaps identified by the matrix may indicate the expertise required of future appointments. This strategic approach to board composition ensures that the skill sets of directors are not only aligned with the current needs of the organisation, but are also suited to future challenges.
Recognising limitations
The board skills matrix should be tailored to the circumstances and requirements of the business. What may be suitable for a small startup or not-for-profit may not meet the requirements of a large corporate organisation.
“A well-constructed skills matrix is useful, but should be regarded as just one piece of the puzzle,” says Victoria Allen, a managing partner at the board advisory and executive search firm Johnson Partners. “Along with skills, you need to take account of the nature of the business, the nature of the directors, the dynamics around the board table and the quality of interactions with management.
“If you don’t, you could end up with silos of expertise where directors are highly skilled in particular areas, but unable to engage more broadly in the issues that are critical for the company. If you’re overly reliant on a skills matrix, you’re overlooking what a well-constructed, high- performing board looks like.”
Allen is often called on to help clients tease out the precise nature of a skills gap. “A client might tell me they want someone with risk expertise, but that means very different things for, say, Westpac and BHP,” she says. “It’s also important to take the company’s short-, medium- and long-term strategies into account.”
Continuous learning
In such volatile times, continuous learning is moving up the list of director responsibilities. “One of the boards I advised recently identified continuous learning as a critical skill set for both boards and the C-suite,” says Cottrell. “I think that acknowledging the importance of continuous learning creates a really strong connection between the board and the organisation that says a lot to shareholders and other stakeholders.
“Organisations around the world are now using a dashboard to monitor ongoing changes to the critical skill sets of the organisation,” she adds. “This not only makes the skills matrix come alive, it indicates to their shareholders that they have a future-forward approach.”
The matrix in action
Practical pointers and insights for setting up, refining and future-proofing a board skills matrix, across a cross-section of organisational maturity and sector needs.
BOARD 101: Matrix basics
When considering the composition of a board, it’s crucial to thoroughly map out the skills, experience and backgrounds that are desired for the board as a whole, according to AICD’s Guidance for Preparing a Board Skills Matrix (bit.ly/SkillsMatrixTool).
The common matrix layout aligns the individual capabilities of each director with the collective needs. This mapping should be closely tied to the organisation’s strategic goals and the principal challenges it faces, ensuring that the board’s composition is aligned with its direction.
It’s also important to distinguish the specific skills and experiences required for board members from those expected of the chair, as these roles will have different responsibilities and contributions. A board should consider how defensible its planned future composition is in the event that it receives unsolicited applications.
A nuanced approach, using a rating scale, can provide a more detailed assessment of the extent to which the board members possess the desired attributes, rather than a yes/no evaluation. To aid in succession planning and the ongoing assessment of board capabilities, it’s beneficial to include the term expiry dates for each board member.
Regular critical examination of the skills matrix is advised, with the board itself or a dedicated committee — such as a nominations committee — performing an annual review. This matrix isn’t just a tool for evaluation, it’s also a strategic instrument for identifying gaps that can be addressed through targeted board training, development and succession planning.
On the flip side, it’s not recommended that boards clutter the skills matrix with basic competencies that are universally expected of all directors, such as an understanding of director duties. Additionally, the inclusion of vague or excessively generalised skill sets should also be avoided, as these do not contribute to a precise and actionable skills assessment.
Case Study #1: Commonwealth Bank
When Commonwealth Bank (CBA) non-executive director Professor Genevieve Bell AO announced that she would step down from the board on 31 October 2023, the nomination committee was presented with a particular challenge — bridging a gap in its digital and technology skills.
Bell, a cultural anthropologist, technologist and futurist, previously a VP at Intel, had been on the bank’s board since 2019. She stood down when she was appointed vice-chancellor and president of the Australian National University.
The nomination committee at CBA reviews its skills matrix annually “to ensure the prescribed skills and experience address CBA’s existing and emerging strategic, business and governance issues”. It also uses the matrix “to guide the identification of potential director candidates as part of the ongoing board renewal process”.
In FY2023, the board revised the “digital and technology” category to “better address emerging issues such as the use of data and analytics, digital transformation, cybersecurity and other technology risks”, according to its annual report.
The matrix maps the skills of directors across 11 criteria and includes the following three levels, which are used to assess the effectiveness of the board and its committees: high competency, knowledge and experience; practised/direct experience; and awareness.
Three out of 10 directors were deemed to have “high competency” in technology (including experience in the use of data and analytics, and in digital transformation and innovation, their impacts on customer experience, cybersecurity and other technology risks). The majority were rated as having “practised/direct experience”.
The board assesses its internal performance annually and external performance every three years. The 2022 internal review concluded that despite a respectful relationship, “more informal engagement between the board and ELT was an area of opportunity”.
Case Study #2: Mortgage & Finance Association of Australia
In June, Katherine McDermott GAICD, then chief product officer with Service NSW, a professional with strong digital skills, was appointed to the board of the Mortgage & Finance Association of Australia. Chair Kerri Buurman MAICD describes the selection process as a learning experience.
“In the finance sector, technology is continuously evolving,” she says. “Our skills matrix showed we needed someone with specific skills in this area. When we advertised the position, we had a fantastic response, but we quickly realised that our wording was too general.
“Technology covers a very wide range of skills and our applicants had very different experiences,” she adds. “We decided to create a document to sit alongside the skills matrix that drilled down into the details and found we really needed someone who had led digital transformation.
“Katherine was a perfect match in terms of experience and culture, so it was a very successful appointment for us. As a board, we learned that a matrix is an important tool to address the core skills you’re looking for, but it isn’t the be-all and end-all.”
While it’s common practice for directors to rate their own skills, “I’m not sure they always do this particularly well, as not all directors are as self-aware as they need to be,” says Buurman. “Some are confident and prone to overestimating their ability, while others have a natural tendency to underestimate. Both are equally unhelpful.”
Honest and open discussions about skills can be valuable, particularly when they’re led by an outsider. “If I, as chair, question how a director came to rate their expertise at a particular level, they might feel offended, which could affect the dynamics around the board table,” says Buurman. “An independent adviser takes the emotion out of the process. Professionals who work with a range of boards are also better placed to benchmark skill levels and help directors be more realistic in their self-assessment.”
Case Study #3: Eastern Melbourne Primary Health Network
As one of 31 primary health networks, the Eastern Melbourne Primary Health Network (EMPHN) is part of the federal government’s plan to increase the efficiency of medical services and improve patient care and support. Chair Dr Stephen Duckett AM FAICD reviews the strengths and weaknesses of the EMPHN board every year.
“The right mix of skills is constantly changing,” says Duckett. “You have to keep on refreshing your thinking on the critical issues that both the board and management need to address now and how you’re going to do that.
“Our directors serve a maximum of three three-year terms, but reappointment isn’t automatic. We assess sitting directors as rigorously as new candidates and sometimes I have to tell them that while they’ve made a great contribution, our priorities have changed and we’re in need of different skills.”
The organisation says the board would ideally include members who work as GPs or have a strong background in general practice, primary care, community health or public health, as well as members with accounting or financial management skills and experience working with (or in) government at a senior policy level. There should also be diversity in age, gender (including non- binary), Aboriginality, ethnicity, socio-economic status, sexual orientation and disability status to reflect the make-up of the EMPHN community.
It’s expected that board members have a mix of 13 skills, including experience in primary care, community health or public health; general practice; mental health care; developing and implementing strategy; commissioning; government and/or public policy processes; community and stakeholder engagement; financial management/ accounting; data analysis/quantitative measurement of performance; data governance and data security; system transformation and innovation in health care; and oversight of risk and the law.
No board can appoint enough directors to cover every useful skill, says Duckett, so they need to think creatively about how they might draw in different experts. “When we don’t have space on the board, we bring external expertise into our subcommittees to provide assistance and fresh eyes on an ongoing basis,” he explains. “In some cases, these are people who can translate the latest information to help the board make informed decisions on complex matters and provide effective oversight.”
Getting help from the experts
As board agendas continue to grow, members are increasingly calling on outside expertise to plug skills gaps. Here, three experts explain how they assist boards and the questions they ask.
Cybersecurity expert: Shameela Gonzalez MAICD
How can directors keep up with change in this area?
“The strategies and tactics of cybercriminals and state actors are always evolving, and new and emerging technologies like AI look set to accelerate change,” says Gonzalez. “It can be difficult for directors to keep pace and while they aren’t expected to be cyber experts, they are expected to help navigate organisations through a serious cyber incident.”
Questions to ask
What are some recent examples of cyberattacks on similar organisations, and how did they affect victims?
Who are the attackers? Where do they come from and what tools do they use?
What decisions will rest with the board in the event of a cyber incident? For example, does management or the board choose whether the organisation will go public, engage with the criminals or pay a ransom?
Can you describe and quantify your organisation’s unique cyber risk?
Are you aware of the organisation’s most vulnerable areas?
Do you know of gaps in your security capability? How will you strengthen this weakness?
Shameela Gonzalez MAICD is a financial services and industry lead at CyberCX.
Climate risk expert: Geoff Summerhayes GAICD
How can directors keep up with change in this area?
Summerhayes, who is also chair of the AICD’s Climate Governance Group Initiative, says: “Boards should have access to a clear overview of the carbon footprints of both their customers and supply chain. You also need to know the scale of the investment required for adaption and resilience, and the action underway. Climate risk and opportunity should be embedded in risk management, relevant committees and the culture of the board, as well as being aligned with incentives and remuneration.”
Questions to ask
Who are our stakeholders?
What is our company expected to do?
What are the risks to our company?
What are the opportunities and potential benefits?
What critical dates do we need to bear in mind?
Geoff Summerhayes GAICD is Senior Advisor Group chair at Pollination.
Critical infrastructure expert: Tim Slattery GAICD
How can directors keep up with change in this area?
Organisations need to uplift their core security practices for critical infrastructure assets, says Slattery, who joined Providence, an Australian veteran-owned professional services provider, in 2020. He points to the Security of Critical Infrastructure (SOCI) Act introduced by the federal government in 2018, which boosts protection for organisations considered to operate critical infrastructure.
Questions to ask
Does my critical infrastructure asset fall within the definitions of the SOCI Act?
Which asset category does it belong to?
What are the directors’ responsibilities under the SOCI Act? Which procedures do we have to perform and what obligations do we have to comply with?
What is the most efficient and effective approach for compliance?
Do we have insider threat and supply-chain security protocols in place?
Do we have any “critical workers”?
What do we need to consider before we approve the organisation’s annual Critical Infrastructure Risk Management Program report?
Tim Slattery GAICD is a senior director of enterprise protective security at Providence.
This article first appeared under the headline 'Solving the Skills Puzzle’ in the December 2023 / January 2024 issue of Company Director magazine.
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