Structuring for Performance vital to world class boards

 What you need to know

• Senior executive experience, not specialist skills
• Focus on long-term shareholder interest
• Ability to ask the right questions
• Depth of governance experience

Australia’s listed and large private company boards need to look beyond specialist skills - and the appointment of "specialists" to fill board seats - if they want to successfully meet long-term shareholder interests, according to Joshua Smith, Partner and Global Head of Board Advisory at Ashurst. Committing to ‘building the best’ board is a key aspect of long-term success for companies he says.

Mr Smith identifies the increasing trend of seeking to fill Non-Executive Director vacancies with specialists – including those who are experts in technology, digital, data, cybersecurity, ESG and its various elements.

“In ASX 200 companies, there is an average of 6.5 NED positions on each board,” said Mr Smith. “If you give one of those to a digital specialist for example, and another to an expert in say ransomware and cyber, and another to ESG and social issues, you don’t leave much room for directors with broader operational and C-suite experience, who understand ‘good governance’, and are able to balance shareholder interests with broader stakeholder interests.”

In discussing the skills mix of boards, Mr Smith said there were four key areas of focus needed to deliver a world class board.

Four Key Areas of Focus for Board Success

• Breadth - Senior executive and broad business experience, not specialist skills.
• Clarity - Focus on long-term shareholder interest.
• Natural inquisition - Ability to ask the right questions.
• Experience – Depth of governance skill and experience.

Mr Smith emphasised that proactive board succession planning, and resultant board composition, is vital to ongoing and sustainable corporate success.

“Instead of a focus on appointing a NED with a specialist skill, we advise our clients to identify skill gaps, and to explore the possibility of covering those using a variety of approaches. We also encourage our clients to think about why such a gap is perceived to exist in the first place – very often we find that a board is consciously or subconsciously covering for a gap that exists in the executive team. This is not good governance practice."

He said Ashurst Board Advisory had recently assisted clients to address perceived skill gaps through hiring expert consultants, and via the creation of specialist sub-Committees, who work with and advise full Committees of the Board, such as a Risk Committee. Expert consultants may engage with and report to the board on a specific project, or as an ongoing engagement. In addition, Mr Smith advised it is important that boards ‘look within' - in other words, utilise the specialists within the company’s existing management ranks, as they have a key role to play in the education and professional development of a board.

When considering specialist skill gaps on boards, and the very pressing areas of current concern, such as cybersecurity risk and ESG/reputational risk, in many instances Mr Smith will counsel his clients against the appointment of a dedicated expert to the board.

“Successful boards are comprised of directors possessing deep operational experience - gained as a senior executive - and a detailed collective understanding of governance, as outlined in the ASX Corporate Governance Council Principles and Recommendations.” he said. “In particular, it’s about structuring the board to be effective and add value. Specifically, the ASX Corporate Governance Council advises that a board must ‘collectively have the skills, commitment and knowledge of the entity and the industry in which it operates’. We note the broad, but critically important, nature of that requirement. It is the skills of the board as a collective, and not that of an individual, that are paramount.”

Appoint with Care

Ashurst Board Advisory says boards should exercise caution in appointing directors who do not possess any form of governance experience, and who are specialists with a narrow, but deep, particular skill set.

Joshua Smith said: “My experience tells me it will be on average two years before that person becomes effective in the boardroom, in the sense that they contribute to the discharge of a board's obligations to shareholders. A large ASX listed board, with seven or more non-executive directors, may have the capacity to invest in a director with ‘boardroom training wheels’, given the board will likely already possess a depth of governance skill and experience.”

He noted that this is not a new concept in Australia's largest listed companies.

“The Australian Institute of Company Directors course [for director training] is among the best of its kind globally,” says Mr Smith. “However, no matter how good the training or how deep a specialist’s skill, there is simply no substitute for deep senior executive operational experience. In developing such a track record, the person is highly likely to have regularly interacted with a board or boards. Good governance is essentially about an appropriate mindset and having the ability to ask the right questions. Unless one has been in a senior operational role, or regularly had a presence in the boardroom as an external adviser, that is very difficult. It means that most often when assisting our clients with their board succession planning, we will be focussed on prospective candidates who have gained senior executive experience in large listed or private companies. They will have spent time in the boardroom, and seen it in action.”

He highlighted the point that most boards understand the need to focus on optimal composition, performance and adding value, and that anointing and overseeing the right strategy is key to delivering long-term shareholder value.

Build a ‘World Class’ Board

“Well functioning boards - the best ones - understand that and know they are working for shareholders – the owners of the company. At the same time, they also understand the broader stakeholder community, and the increasing societal expectations placed on them.”

On the value theme, Ashurst Board Advisory points to the critical importance of the first responsibility of a board – the appointment of the CEO. Mr Smith emphasises that this is paramount, and that appointing the wrong CEO can quickly destroy shareholder value.

“We have seen many examples of boards appointing a CEO who is the wrong fit. It is vitally important that a board get this right. Ultimately, a depth and breadth of senior executive experience in the boardroom, a group who have been there before, is key to minimise this risk. If a board wants to address perceived specialist skill needs, fill skill gaps or provide additional training in the boardroom, it's important to recognise that these needs can be met in other ways, such as, for example, the appointment of independent committee members who are not directors.”

Ultimately, Mr Smith observes that a board, led by its nominations committee, must determine which skills are most important to it, and prioritise accordingly. Although there is unquestionably a need for a board to embrace and understand technology, data, cybersecurity, ESG (and all of its elements), he cautions that boards must exercise due care in making “specialist” director appointments.

“Boards must be satisfied that the addition of a particular individual / skillset(s) will operate to improve the high-level governance of the company. If this is not achieved, it is, in effect, giving a board seat away, which cannot be in the best interests of shareholders and stakeholders, and may result in suboptimal decision-making impacting board and company performance.”

Author: Joshua Smith: Head, Board Advisory.