Boards exhibiting tunnel vision by always recruiting former CEOs run the risk of missing out on critical skills mix opportunities. 

    Over time, there has been much discussion on the ideal composition of skills for board members where the importance of experience in managing profit and loss (P&L) statements has been emphasised. Traditionally, some have said that effective non-executive directors are typically former chief executives or individuals with substantial financial expertise. This perspective suggests understanding and overseeing financial statements is paramount for board effectiveness.

    There is no doubt that former CEOs can bring exceptional strategic and operational skills to a board of directors. Running a P&L gives a person unique insights into balancing long-term capital investment and short-term profitability, while being forced to solve increasingly complex problems. But in my view, it would be a failure in governance if a chair in 2024 were to stack a board solely with former CEOs.

    Major companies, including leading global miners, now acknowledge the need for diverse skills and gender representation on their boards to meet stakeholder expectations and achieve success.

    BHP Group serves as a prime example, with its board chaired by Ken MacKenzie FAICD, a former Amcor CEO. The board includes five other former CEOs from various sectors, and additional members with backgrounds in auditing and technology. The board’s composition includes professionals from engineering, accounting, banking, law and computer science, reflecting a robust diversity of skills and gender.

    For the purposes of this column, I spoke to a range of non-executive directors and chairs. Most of them expressed dismay at the idea that a board might comprise only people who had run a P&L.

    Former barrister and chair of Collins Foods, Robert Kaye SC, who has carved out a decade-long career as a non-executive director, says he would not have a job if the “must have run a P&L” criteria had been applied.

    “It is rare to have people with legal backgrounds who have run a business,” he says. “In my case, I’ve advised a myriad of businesses, but I haven’t actually run any major ones outside of family ones. Effectively, that would mean any lawyer would be almost immediately excluded from consideration, no matter how senior they were or how relevant their legal experience might [be to the role].”

    However, Kaye does note that every board needs someone with deep experience in the industry in which the company operates. That usually means reasonable tenure as a CEO or chief financial officer. He adds that directors who were previously heads of human resources or people and culture can also make a valuable contribution, particularly if they have worked at a large corporation with thousands of staff.

    Another important criteria, according to Kaye, is digital and IT experience, which he says can be acquired without having been the CEO of a tech company.

    “People who have been involved in running a business are always going to think they are best to run any business,” he says. “That does have to be broken down. We’ve seen lots of borderline corporate failures based on that premise. It doesn’t work. That’s why over the past five to 10 years we’ve been encouraged to introduce greater diversity and graded thinking.”

    Kaye is wary of the mantra that directors must have been CEOs because he has found that some are stuck in the past and unwilling to accept modern ESG (environmental, social and governance) compliance, with its heavy demands from regulators and stakeholders.

    “The CEOs who came through the world as it was in the older days would really not necessarily understand the demands on directors now,” he says. “There would be a very strong temptation to say, ‘It worked well for us all those years ago and all this ticking boxes on compliance and bureaucratic red tape is unnecessary’. I don’t want to be uncharitable, but that is a function of age and time. You’re going to be stuck with the baggage of the mindset.”

    Another respected non-executive director who reckons the “must have run a P&L” criteria is a significant distraction from the main game is Suncorp Group chair Christine McLoughlin AM FAICD.

    “Historically, the pathway to chairing a board — or possibly even being on a board — was from a CEO or in the P&L background,” she says. “But we’ve evolved so much in our thinking. It’s recognised now that well-rounded people make terrific directors because we’ve come to recognise that the role of the chair, and the director, is very different to that of a CEO.”

    McLoughlin adds that a diverse group of directors is essential. “You need that mix. The CEO role is very much about leading the execution of the company’s strategy, whereas the role of the board and the chair is really to give wise counsel to the leadership of the company — and to challenge and support the CEO and management team as they execute the strategy and the plans.”

    She says boards have to reflect the society in which they are living to include different ages, nationalities and genders.

    It’s not advisable to expect only individuals with a human resources background to oversee a company’s culture on a board. Nor should those with a financial background be solely responsible for looking after the organisation’s finances. Instead, the chair and the board should collectively play a significant role in shaping the culture, which is largely defined by the CEO’s standards, values and purpose. McLoughlin says boards need to actively ensure that CEOs foster a healthy, vibrant and inclusive culture.

    She also advises CEOs to, “let go of the natural inclination to take charge” — adding there is a distinct advantage in having board members who have experienced challenges. “Those experiences define you,” she says. “They make you a better contributor and bring perspective to help you decide when something is important — or when something’s just very noisy.”

    This article first appeared under the headline 'Getting the Recipe Right’ in the June 2024 issue of Company Director magazine.

    Tony Boyd is an AFR contributing editor and former Chanticleer columnist.

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