Skill Diversity Contributes to an Effective Board

Building an effective board is a key challenge faced by social startups and skill diversity may be the solution, according to Alan Castleman of the Board Advisory Group.

Diversity is one of those ‘in’ words which mean different things to people. Often it is just used to refer to gender diversity, but board diversity should mean having an ‘appropriate’ diversity of skills and experience among board members, as well as gender diversity.

Over the last 20 years and earlier as an executive I have served as chairman of some 15 boards (including ASX listed, private government and not-for-profit) and double that number as a director.  The opinions expressed here are drawn from that experience.

The skills appropriate for any board, whether a commercial, Not for Profit or public sector, depends on the nature of the organisation, its purpose, its shareholding or membership, and the nature of its business. The current stage in its life cycle is also relevant.

For example, an organisation in financial difficulty or with new capital demands or a changing operating environment may need strong support in some areas.  

Financiers may wish to see that the business has one or more directors with strong financial or project management skills. On the other hand, a company in a strong growth phase may need other skills.

Essential skills for all directors include:

• A capacity to understand the business or organisation and its industry, its clients or customers, and its competitors. The skills and experience needed here will vary from organisation to organisation.

• Enough financial and accounting knowledge to understand the condition of the company and meet statutory obligations.

• Enough understanding of the laws under which it operates and of ethics to ensure good governance.

The above skills are needed by all directors. Any director deficient in any of the above three areas will be a drag on the board and may prevent the business meeting its legal obligations.  Note that the skill levels are not expressed as being expert.

Other skills spread across directors may include an expert level of knowledge and experience in:

• The particular business area of the company/organisation

• Business in general – particularly relevant for Not for Profits

• Finance/accounting

• Marketing

• Production

• Relevant sciences or technology

• Executive performance assessment and remuneration which includes CEO recruitment and termination and overviewing other executive performance.

Not every director can or should be skilled in all relevant areas for which skills are needed, but each director should contribute to the total relevant skill and experience mix.

The board as a whole needs sufficient skills to understand, critically examine, and assess proposals from management and consultants as well as assessing the performance of management. However for a large company or organisation, you would not expect board skills to outweigh that of management.

It is also relevant to consider the skill base of the executives and others in a company.   Large companies can be expected to have adequate skills in all needed areas among its executives and specialist staff, or be provided through consultants but this is often not the case for smaller businesses and Not for Profit organisations.

For small businesses and Not for Profits it can be different. They often cannot usually afford the cost of highly skilled and experienced staff in areas where a full time staff member is not needed. Consultants are sometimes not the answer and can be expensive. In these situations, external director skills take on a special significance and value to the business. Smaller businesses and Not for Profits organisations often seek a director to fill a skill gap such as contacts in industry or government, IT, marketing and fundraising skills.

Sometimes a director is appointed for 'representational' reasons maybe to represent particular shareholders or community groups; the skill issue here may be different.

It is worth remembering that at law directors have many responsibilities.  Of course they have a duty to represent the best interests of shareholders but the law also places many other obligations on directors relating to the environment, workplace issues, taxation and general compliance with all relevant laws.

Although not listed as a skill, ‘maturity’ and ‘strength’ can be important personal qualities for a director. Boards are sometimes faced with a minor or major crisis.  It might be a receiving a takeover offer or a reputational issue or the sudden emergence of some major threat such as changes to or cessation of funding sources.  At these times mature judgement is needed.

There have been instances where directors or chairs ‘go to water’ when faced with these crises or their personal interests take precedence and resign from the board. This is real and important issue to bear in mind.

We stress the importance of identifying the skills and experience needed for each particular board, and then recruiting candidates who meet the desired criteria. Remember needs can change over time.

Regular board reviews and professional recruitment assistance for directors can be a big help.

About the Author: Alan Castleman is Chairman of the Board Advisory Group and has been a professional company chairman, director and board advisor over the last 20 years following a 24 year career, the last decade as a senior executive in financial and general management roles, with BHP. Over the last two decades he has chaired over 15 boards, listed, mutual, non-listed public, government owned, subsidiary of overseas public, private, NFP and public and private advisory boards, and served on many other boards as a director. In recent years he has also worked in the board advisory area with ProNed Vic, now known as The Board Advisory Group.