Investor View: Skills of Effective Boards

In the 2015 Governing the Global Company report, the authors noted two particular issues that global-company boards consider most pertinent: risk oversight and the global talent pipeline. Risk oversight was no surprise given the regulatory, legal and social complexities of operating a global organization. Furthermore, with 80% of directors and executives reporting increasing board involvement in firm strategy over the past few years, it makes sense that they would want qualified colleagues at the table.

A recap of KPMG’s 12th Annual Audit Committee Conference in February perhaps put it best, “This greater level of board engagement in strategy may require ‘a transformation in director skills and experience,’ said one director. ‘It’s critical that boards assess composition and succession planning based on the skill sets that will be most relevant to the company’s strategy in the next three to five years.’” Managing executive-level talent and leadership development, and director recruitment and succession, are perhaps two of the most difficult governance areas to quantify and thus improve; however, they are critical to long-term success.

While our previous post noted financial, industry, operational, and risk management expertise as the most important skills for director candidates, companies are also seeking active CEO or COOs, women and minorities, which the 2014 and 2015 Spencer Stuart Board Index highlights (from the January 2016 Deloitte report, “On the board’s agenda”). Diversity, tenure and independence among directors have all been hotly-debated issues in, and outside of, the boardroom, as shareholders consider the value that new and different perspectives can bring to the board—and the company.

Over the past few years, shareholders and activist investors have been increasingly involved, pushing for proxy access, strategy shifts, as well as environmental, social and governance (ESG)-related changes. Despite the growing focus on ESG initiatives, board composition is still a primary area of concern. Based on the recent mid-year review by the EY Center for Board Matters of 890 shareholder proposals, board-related proposals have increased from 28% in 2015 to 37% in 2016 (as of June 30, 2016). In a webcast with KPMG earlier in the year, Glass Lewis Chief Policy Officer Bob McCormick cautioned corporate boards of this trend, suggesting they consider how to better engage investors, understand their expectations, and improve the way that they communicate performance, strategy—and particularly the qualifications of directors.

Some companies have begun to include skills matrices or graphic representations of the board’s collective skills, diversity, tenure and independence in their proxy statements; but, is this really enough to appease investors? As shareholders continuously push for more accountability and transparency in the boardroom, communicating the background and capabilities of the board and leadership will be ever more important. To reiterate the closing statement of the Marsh & McLennan Companies and NACD report: “As companies continue to expand global operations, boardroom processes and director skillsets must evolve in order to ensure effective oversight in an ever more complex operating environment”—and boards must find a way to effectually portray this evolution.

 

Enlight uses advancing technology and proprietary algorithms to identify and assess the skills and experience of individual directors and the collective board. Corporate secretaries and nominating and governance committees can easily evaluate a prospective director’s skills in relation to the other board members; investors can view biographies and gauge boards’ collective skills across their holdings; boards can even predict how their skills may be perceived by investors.