Ensuring your board has the right skills to face the future of governance is a fine art. We share our top tips for improving your board's balance.
The spotlight is now on board composition from the perspective of board performance, director accountability and the over-boarding or tenure of individual directors. It is not surprising that in the AICD Director Sentiment Index (2H18), 74 per cent of directors said their business is actively seeking to improve diversity of skills in board membership.
Board member renewal and the skills matrix are critical and deliberate decisions. Board composition is best when aligned to the organisation’s short- and long-term strategy. Board quality requires more than drawing on certain job titles, career paths and whether those already on the board know the director candidate.
Of necessity, the nominations committee needs to be forward-looking. Shifts in consumer trends, digital marketing, technology, cyber, market disruption, societal expectations and behavioural dynamics can readily point to potential fault lines in board capability. These factors also signal the “future director”.
10 factors to consider in director selection:
- Is experience from the same industry mandatory? Or is greater value gained from someone who has capabilities with relevant types of customers, supply chain management issues, business models, competitor challenges, geographic reach, regulatory demands, transformation programs and market disruption? Someone who understands the “business of business”?
- What strategic work has to be addressed? Do we need a background in dealing with the systemic issues or strategic choices of an organisation at the same life cycle stage? Can the new director help steer the organisation around the next few corners as the business keeps developing, diversifying, prioritising or refocusing?
- Competing for attention is a range of internal and external stakeholders. How useful is a skill set in managing or influencing these different interests and the opportunities or risks they present?
- How can we ensure robust decision-making? In the context of the board’s pressure points, what types of critical thinking, judgment and insight enable the organisation to continually improve or seek best practice?
- Boards deal with ambiguity, dichotomies and complexity. Directors often balance opposites: the short term versus the long term; increasing shareholder value versus acceptable returns on capital invested; organic growth versus growth by acquisition; commercial impact versus social impact; and values versus profit.Who can help us deal with the uncertainty or think beyond the linear or clarify alternative scenarios?
- Customer motivations to buy a product or service are not uniform and there are many channels to interact with or form an impression of an organisation. Who can help us get closer to our current and emerging customers or better know the marketplace or competing interests?
- The workscape is changing considerably. Human capital trends, as highlighted in the AICD report Directors’ Playbook: The Future of Work sets out new issues for board agendas. How useful is a skill set in resolving tensions across systems, organisation silos or group? What transformation or organisational change work is planned? Will success be improved with an understanding of people and culture or managing transitional impacts?
- Boards are expected to have intellectual rigour, drawing on a mix of functional expertise, industry experiences, qualifications and demographics for good governance on wide-ranging, complex issues. Can we strengthen our board’s cognitive and demographic diversity?
- Will a wider generational mix on the board add needed perspectives on changing business models, the new way of work, consumer trends, digital user experience and digital communication?
- How will we onboard, orientate and support the new board member, particularly a first-time director, to avoid a false start and maximise his or her early contribution?
Board selection decisions come down to four factors: context, capability, motivation and fit. Board strength is the synergy of individual skills, experiences and potential.
Getting the mix right
Carefully considered structure and composition enable a board to fulfil its role effectively.
Having the right people around the table is vital to the effectiveness of a board. Boards should look critically at who their directors are and how they are appointed. There is no one-size-fits-all ideal structure.
One of the benefits of a board is that it brings several minds to focus on a shared purpose. This benefit is multiplied when directors bring diverse perspectives to bear on their work.
Research shows that board diversity can contribute to improved performance. Diverse boards have been shown to increase staff retention and engagement, promote a better understanding of an organisation’s stakeholders and drive innovation.
Boards should aim to reflect a mix of personal attributes in their composition, including gender, cultural and linguistic background, professional experience, sexuality, age, religious belief and experience.
It is diversity in thinking style — "cognitive diversity” — that influences a board’s performance.
Directors are generally appointed by direct appointment for a fixed term by the board or elected by the members.
It is a good idea to set out the process for appointing directors in a policy, including matters such as who is eligible, how they can nominate and processes that must be followed so their appointment is valid. Making this policy available to stakeholders helps with transparency.
AICD has formulated a checklist to help boards get their composition right. These questions are applicable to both for-profit and not-for-profit organisations.
Is the board of an appropriate size to:
- Discharge its workload effectively?
- Have productive discussions?
- Be able to plan for orderly succession?
Skills & experience
- Does the board comprise an appropriate mix of skills, experience and backgrounds that aids decision-making and enhances board effectiveness, particularly having regard to the organisation’s needs?
- Is the mix of skills, experience and backgrounds on the board aligned with the overarching strategy of the company?
- Do all current board members bring skills and experience relevant and useful to the board? While there can be a tendency to focus on having technical or other specific skills on the board, it is important to have a good cross-section and generality of skills.
Policies & practices
- Does the board have appropriate policies and practices to enable orderly board succession?
- Is the board, at appropriate intervals, undertaking regular and rigorous assessments of the skills, experience and backgrounds desirable on the board to identify any potential gaps?
- Does the board employ a skills/experience/background matrix as part of its assessment of its composition?
- Has the board adequately considered its approach to gender diversity including, where appropriate, formulation of relevant policies?
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