As the board’s role continues to evolve in the wake of the financial crisis, board composition — the “right” number of board members with appropriately diverse skills and experience — is high on the agenda for boards, investors, regulators, and politicians.
From the non-executive director’s perspective, strategy has to be the number one reason for looking at board composition.
The critical priority for boards today should be aligning boardroom talent with company strategy, both for the short and long-term.
Whether it’s addressing a gap around technology or finding people who have international experience, talent needs to be part of the strategy discussion. So, Question#1 that non-executive directors should ask is what the company’s strategy is (i.e., they need clarity of purpose and direction), and Question#2 is where the skills gaps in relation to that strategy are?
Diversity & talent
Question#3 for non-executive directors is about diversity. Does the board have the right combination of skills, backgrounds, experiences, and perspectives to probe management’s strategic assumptions and help the company navigate an increasingly volatile and fast-paced global environment?
Diversity is not just about race, gender, sexual orientation and disability, important though they are. It’s also about the richness of the board as a whole and the combined contribution of a group of people with different skills and perspectives to offer.
People with different experiences, backgrounds and life-styles who together are more able to consider issues in a rounded, holistic way and offer an attention to detail that might not be present on less diverse boards.
Closely linked with diversity is the breadth of the talent pool from which new board members are sought. Question#4 is about whether sufficient attention has been given to recruiting directors with backgrounds in academia, government, civil society, as well as entrepreneurs and those from family businesses. KPMG Connect On-Board is one platform for facilitating access to a broader and deeper pool of talent www.kpmgonboard.co.uk.
IT literacy & agility
Question#5 is about challenging conventional wisdom. Is the 20th century paradigm of filling boards with directors with “big company” experience still relevant in an age where an understanding of “new” technology and the agility to manage the consequential opportunities and risks are vital to success? Are today’s boards too old and too IT illiterate?
It is true that IT talent can be hired at an executive level, but boards still need to be able to “ask the right questions” and just as important, “understand the answers”. So, is there a role on the board for the bright young Turks of the technology world? And if not for the usual three terms of three years, then perhaps for a shorter term?
Evaluation & succession
Getting the board composition right is underpinned by robust board evaluation and formal succession planning. Board evaluation is particularly useful in cases where there are unresolved difficulties around the boardroom table or if the company has changed significantly since the core members of the board were appointed. So, Question #6 is do we have a robust board evaluation process that focuses not only on what the board does, but how it does it and how it can improve.
Similarly, Question#7 is about formal succession planning. A recent survey of over 2,000 board members by KPMG’s Audit Committee Institute found that 77% of respondents considered formal succession planning to be a critical factor in achieving the “right board composition”, yet less than a third reported having a robust formal succession plan in place.
Boards may be taking an increasingly rigorous approach to the succession of the executive leadership team, but it is clear that for many companies more needs to be done in applying a similar approach to their own composition.
Departures & leadership
Question#8 is about whether underperforming directors are being removed in an efficient and effective manner. There is no set formula for tackling boardroom change, but every board should have a system by which a director can voluntarily step off, or the board could say, respectfully: “We’ve really valued your service. It’s just time for a change because it’s good for the company.”
Another pitfall to watch out for is appointing (say) reputable personalities or people “known to the board” without considering whether their capabilities match the requirements or needs of the company.
Question#9 is about countering this risk. Are matrices identifying any missing knowledge, skills and expertise being applied without fear or favour when recruiting new board members?
The final question, Question#10, concerns leadership. Meaningful, constructive dialogue is essential for an effective board and this depends heavily on the board chair.
The characteristics of a good chair are legion, but at the very least consider whether they are creating the conditions for overall board and individual director effectiveness — demonstrating the highest standards of integrity and probity, and setting clear expectations concerning the company’s culture, values and behaviours, and the style and tone of board discussions.
Timothy Copnell, associate partner, KPMG in the UK and head of the UK Audit Committee Institute.