Skill Diversity: The Foundation of Board Effectiveness

Board diversity is a popular topic of discussion in recent years, particularly the gender diversity. Another aspect of diversity that is as much important and the Board should not overlook is skill diversity. It covers skills, knowledge, expertise, and experiences of each Board member.

Since the Board’s decisions and its governance role have substantially impact corporate performance, the Board composition should comprise of competent individuals with diverse knowledge and experiences. The Board diversity will create extensive views to ensure comprehensive analysis and assessment of the situation. This will allow the Board to appropriately identify opportunities and threats, set out strategies, achieve targets, and grow sustainably in the long run. Under rapid and ever-changing global context and competition environment, skill diversity of the Board in alignment with corporate strategies becomes even more crucial to help the organization tackle challenges from changing conditions and respond to diverse demands of stakeholders in a timely manner.

Skill diversity in international Boardrooms

The essential international corporate governance principles, prepared by the OECD, emphasizes on having appropriate skills of the Board to perform their duties since 2004. Economic crises and falls of various businesses demonstrated that skills of the directors are crucial factors affecting the collective performance of the Board. According to the G20/OECD Principles of Corporate Governance 2015, the OECD indicated that the Board should comprise of directors with appropriate background and expertise to independently perform their roles. According to a survey by OECD, most countries have established guidelines on Board diversity in their corporate governance principles. For instance, Singapore stated clearly list of skills directors should cover. Meanwhile, many countries also focus on balancing diverse skills, knowledge, and experiences of directors more than specific qualification of individual directors. Guidelines in the U.K. suggested the Board to consider balancing skills, experiences, knowledge, and independence of directors before setting the criteria for recruitment of new directors.

Standard qualifications of director in terms of desirable skills and experiences usually include knowledge in finance, accounting, auditing, legal, industry, and experiences in business administration. But in the current world where the focus has been shifted to new issues like corporate sustainability, interests of stakeholders, disruption, and the board’s roles in corporate culture, boards of many organizations started to emphasize on recruiting directors with “non-traditional” skills and experiences, such as ESG expertise, human resources, technology, and international business administration. According to a survey of listed companies in the U.S. by Institutional Investor Service in 2019, new directors assigned in 2019 possess more of non-traditional skills and experiences to complement standard traditional skills of existing directors as shown in the chart below.

However, “proper” skill diversity in the Boardroom should not only fit with new challenges but also with business direction and goals of the organization. Therefore, skill diversity in the Boardroom of each company is naturally different and there is no fixed formula. The right mixture hinges on particular strategic business context that must be determined by each Board.

Skill diversity in Thai Boardrooms

In Thailand’s Corporate Governance Code for Listed Companies 2017 (CG Code), the Securities and Exchange Commission encourages Boards to balance mixture of expertise appropriate for governing and strategy driving in accordance with business context. The CG Code recommends recruiting directors with diverse skills and experiences while at least one director should have experience in key business or industry. The selection of directors must be in alignment with corporate strategies and help the Board achieve main objectives and goals of the organization.

However, according to the IOD’s Corporate Governance Report of Thai Listed Companies 2019, only 32% of Thai listed firms set director recruitment criteria in accordance with their corporate strategies.

Guidelines for building skill diversity in the Boardroom through Skills Matrix

The CG Code recommends the use of Skills Matrix as a tool to ensure the elements of the Board have well-balanced qualifications and in alignment with corporate strategies. Preparing Skills Matrix will be useful in new director recruitment and development of existing directors to enhance the Board performance. The Skills Matrix preparation, a joint responsibility of the Chairman of the Board and Nominating Committee, can be conducted by the following steps.

1. Consider skills needed to deliver on strategy and vision
Consider knowledge, skills, and expertise needed to achieve current corporate strategies and the composition of the Board that will lead the organization toward the vision. In this step, there is no need to consider skill set of the current Board yet.

2. Consider current issues
Consider skills or experiences that will help the Board tackle problems and business challenges it is facing such as short- to medium-term competitions, disruption trends, ESG issues, or a crisis.

3. Consider future scenarios
Consider corporate strategies in the future, taking into account both positive and negative business issues (i.e. changes in strategies, business model, M&A), and consider the skill set that will help the Board respond effectively to future scenarios.

4. Prioritize skill requirements
Prioritize skills, experiences, and knowledge derived from steps 1-3. Rate each skill with a score based on strategic opportunity and threat ranging from 3 = high, 2 = moderate, 1 = low, and 0 = irrelevant. The following questions can be used as criteria.
• Is the skill considered “Mission Critical” for the business?
• Will the skill help mitigating key business risks?
• Will the skill contribute to the achievement of the vision and long-term goal?
• Will the skill contribute to attaining strategic goals?
• Is the skill considered specific and rare?
• Is the skill needed by the Board for the short-, medium, or long-term?

5. Decide on skills needed
Following skill prioritization, consider which skills and experiences should be included in the Board by comparing skill set of the Management and external consultant to see if the Board needs to develop their skills further or should new directors with certain expertise be recruited. The Board may discuss with relevant committees to jointly consider desirable skills to be recruited and developed.

6. Assess current Board skill set against skills needed
The Board should assess skill set of the current Board against skills needed by preparing Skills Matrix. This step can be done by putting key skills needed in the first column of the matrix and names of current directors in following columns to determine which skills are still absence. Should there be any skills lacking from the existing Board or the number of directors is insufficient, the Board may consider director development or director recruitment to bring talents with certain expertise on board.

The Chairman of the Board and the Nomination Committee should review Skills Matrix periodically, at least annually, in conjunction with the Board evaluation to ensure maximized benefit in preparation of new director recruitment criteria and development of existing directors. They could also prepare a short version of Skills Matrix for disclosure of Board elements to stakeholders in the annual report.

Reference
• The Securities and Exchange Commission (2017), Corporate Governance Code for Listed Companies 2017
• Thai Institute of Directors Association (2019), Corporate Governance Report of Thai Listed Companies 2019
• AICD (2013), “Six Steps Towards a Board Skills Matrix”
• Institutional Investor Services (2019), “U.S. Board Diversity Trends in 2019”
• OECD (2015), G20/OECD Principles of Corporate Governance 2015
• OECD (2019),OECD Corporate Governance Factbook2019

Charawi Chiramakara
Senior CG Analyst – Training and Facilitators
Thai Institute of Directors (IOD)