F E AT U R E
Better guidance for NEDs —
ensuring the board is skilled
appropriately
By James Beck, Managing Director, Effective Governance
A study of more than 100 board reviews
undertaken globally over a five-year period by
Egon Zehnder International,1 revealed that most
boards face five key challenges.2
1. Inadequate competencies — Although the vast
majority of board members are capable, other
members are not fully qualified to play their
most critical roles.
2. Lack of diversity — Comfortable collegial
environments may discourage robust,
constructive debate and stifle independent
thinking.
3. Underutilisation of skills — Even competent
directors feel their skills are underutilised due,
for example, to lack of briefing on critical
issues and under-involvement in key decisions.
4. Dereliction of duties — As an example of not
fulfilling their duties, less than half the
directors reviewed in the study believe their
company has the right balance between short-
and long-term goals or that their boards have
sufficient debate on strategy.
5. Poor selection and assessment processes — Board
members are typically very critical about their
selection and the way their performance has
been reviewed (or not reviewed) in the past.
As the study reveals, many boards either lack
competent members or underutilise the skills of
directors, a factor that has come into sharper focus
with the global financial crisis.
CAMAC review
To address the issue of board competency, the
Australian Government has requested its corporate
law advisory body, the Corporations and Markets
Advisory Committee (CAMAC), to examine the
guidance required for executive directors and non-
executive directors (NEDs) to fully understand the
responsibilities of their roles and in particular
‘what support can be provided to increase the
engagement of NEDs with their position on the
board and bring an independent and broad view
to board decision making’.3 The results of
CAMAC’s review are to be released in April 2010
and will likely see changes to the ASX Corporate
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N O V E M B E R 2 0 0 9 K E E P I N G G O O D C O M PA N I E S
Governance Council guidelines and similar
guidelines from other corporate regulators.
As the terms of reference for the CAMAC
review highlight, Australian NEDs do not have
access to the same basic guidance about their roles
and responsibilities as that available to UK
directors through the Financial Reporting
Council’s Combined Code of Corporate Governance.4
Schedule B of the Combined Code is not
extensive, but it does outline the care, skill and
diligence a NED should exercise. Such guidance is
a starting point, but boards are negligent if they
do not inform directors what is expected of them
during the director nominations process and, at
the latest, the orientation program.
Expectations and competencies
Boards that make the expectations on directors clear
from the outset may even find that prospective
board members will reconsider their nominations if
they know they do not have the requisite skills and
knowledge. These expectations include the director’s
ability to commit time to the role — a sometimes
overlooked aspect of board membership. Another
expectation may be that a director will use their
networks to benefit the organisation, as is often
the case in not-for-profits. However, if such an
expectation is not communicated, those networks
may well prove worthless.
What competencies should directors possess to
be effective? There is no simple answer. It depends
on a number of factors such as the organisation’s
industry (for example, credit unions, not-for-profit
organisations, mining industry), current and
anticipated challenges, the regulatory
environment, the organisation’s business or
operational model, required roles of the board,
and the abilities of the senior management team.5
High performance boards will periodically
consider the balance of knowledge, skills and
experience around the boardroom table to
determine whether any change in membership is
necessary. This will involve consideration of:
• the present composition of the board, its
strengths and weaknesses including weak or
uncooperative performers

• the qualities and skills that the company needs
on its board such as
– experience of industries and professional
disciplines
– knowledge and experience of corporate
governance and
– personal qualities
• the changing needs of the company and
• the expected pattern of retirements on the board.
Competencies not a guarantee of
success
Board members, or indeed any employee, cannot
perform to expected standards without
competencies, but specific competencies such as
legal or engineering qualifications, for example,
cannot guarantee that they will perform adequately
as directors. Sometimes competent individuals may
fail on a board due to personal and environmental
factors out of their control. Based on our experience
in reviewing many boards, an analysis of director
competencies should consider three areas.
1. Behavioural factors include both personal and
interpersonal competencies, which provide the
platform for most work and governance roles.
Examples are common sense and sound
judgment, enthusiasm and resilience, analytical
decision-making ability and effective
communication skills.
2. Governance issues encompass financial literacy,
strategic awareness, risk management
orientation.
3. Technical skills are also important, including
legal, accounting and engineering abilities.
Clearly, directors will not be strong in all areas.
Specific technical skills, such as accounting or
legal qualifications, are generally not a
requirement for a majority of board members.
Thus, current directors, as well as board
candidates, should have well-developed behavioural
competencies, be able to master the governance
competencies and add functional expertise in the
form of their technical competencies to a board or
management team. In some organisations, the
technical expertise a board member brings may not
be regularly available to the management team and
can be invaluable. Such specialist knowledge may
offset any lack of governance knowledge on the
director’s part; that is up to the individual board.
Board renewal via succession planning
or external advisers
It is important that a board has a good
understanding of what skills it has and the skills
required. It should take a strategic perspective to
adapt to the organisation’s current and future
environment, particularly in light of issues such as
climate change, which may entail changes to board
F E AT U R E
composition and a focus on succession planning at
board level.
Board skills analysis can also be effective where
replacing current directors is not an option. Where a
board finds it is lacking in essential competencies —
while not ideal — the slack may be taken up by a
highly competent management team or by external
advisers and consultants. If the board knows its
deficiencies and addresses them in some form, that
will go a long way towards individual board
members demonstrating the care, skill and diligence
expected of a director.
Accountability for board performance will
continue to intensify and goes beyond the guidance
to directors that may be provided by our regulators
because of the CAMAC review. This is due to
ongoing shareholder activism, media attention and
community outrage over the type of corporate
behaviour witnessed in cases such as James Hardie.
Whether a regulatory requirement or not, a board
wishing to move to a higher level of performance
should consider analysing the capabilities of those
who govern the organisation to ensure their skills
are sufficient to carry out its current and emerging
roles. As US governance experts Jay Conger and
Edward Lawler state ‘in staffing most boards, it is
best to think of individuals contributing different
pieces to the total picture that it takes to create an
effective board’.6
An effective board is well-balanced. It is one way
to reduce the risk to an organisation and to
individual directors from poor decisions made
because of inadequate knowledge of governance,
strategy, compliance, risk management or the
financial aspects vital to the viability of the
organisation.
Notes
1 The study included surveys of over 1,000 directors. The
organisations involved covered a wide range of businesses,
from large to small, listed public companies as well as
government and family-owned, and based in every major
industry sector
2 Thomas C, Kidd D and Fernández-Aráoz C, 2007, ‘Are you
underutilizing your board?’, MIT Sloan Management
Review, Vol 48 No 2, pp 71–76
3 Terms of reference on guidance for directors, August 2009,
available at www.camac.gov.au [24 September 2009]
4 Financial Reporting Council, 2008, The Combined Code on
Corporate Governance, London: Financial Reporting Council
5 All boards will also generally require certain broad
knowledge such as an in-depth knowledge of the
company and an understanding of the industry in which it
operates. This knowledge can be developed during the
induction process and early in the director’s tenure
6 Conger J A and Lawler III E E, 2001, ‘Building a high-
performing board: How to choose the right members’
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