The key skills and attributes of an effective company director

Boards often make headlines for where things have gone wrong in the leadership of an organisation. A spotlight is shone on the weaknesses of boards and their directors, highlighting what they could have done better. What about the boards that get it right? What does it look like to be an effective board or on an individual level, an effective director?

The board as a collective needs the necessary skills and experience to effectively lead an organisation. It’s the combination of these skills and experience that have a direct impact on board performance and decision-making.

Each director contributes to the overall strength of the board. A competent director brings to the table a strong blend of experience, skills and behavioural attributes that are relevant to the organisation they lead.

In this blog, we explore the key skills and attributes needed to be an effective director of any organisation in the financial services industry and beyond. We also consider how these skills and attributes influence company risk culture and how individual director competencies are assessed.

Factors to consider in director recruitment

When recruiting a director to a company board, the following factors and corresponding questions should be considered as part of the process:

Relevant experience – will their insights and knowledge directly benefit the organisation in question?
Skills they possess – do they possess the technical and professional skills that fill an identified skills gap?
Attributes and mindsets – is the way they think and act aligned with the organisation’s values and expected to contribute to effective decision-making?

In addition to the appropriate checks, the above questions should be asked and answered considering the entire board, before appointing a new board director. To ensure the appropriate process is followed, the ASX Corporate Governance Council recommends boards have a nomination committee responsible for “the process for recruiting a new director, including evaluating the balance of skills, knowledge, experience, independence and diversity on the board.”[i]

The assessment of board director competencies should not be limited to the time of appointment but also performed periodically to confirm their skills and attributes continue to be appropriate to perform their role effectively.

Skills of an effective director

According to the Australian Institute of Company Directors (AICD), a director needs to possess the following key skills[ii] to be effective in their role:

Industry knowledge – awareness and understanding of the industry in which the organisation operates; does not necessarily need to be an expert in the field.
Technical skills – industry-specific or functional expertise such as accounting, finance, operations, sales, marketing, or other areas relevant to the organisation.
Strategic expertise – forward-thinking with the ability to rise above the detail and consider the industry and business environment in short and long-term decision-making.
Legal skills – an understanding of compliance obligations and the impact of regulatory changes on the organisation.
Risk management capability – an understanding of the present and potential risks faced by the organisation and strategies used to mitigate those risks.
Leadership/people management – experience in leading others, including day-to-day management experience, to understand the impact of decisions on organisational staff, and mechanisms to drive engagement and high performance.

Hall Advisory also considers the following skills to be important:

Technology strategy capability – for many businesses, technology is fundamental to future growth and efficiencies. The knowledge and ability to instigate and oversight effective information technology architecture planning and implementation is therefore often highly valuable, if not essential.
Cyber risk awareness – the risks associated with the required use of technology and potential unauthorised access to company systems and data continues to escalate, particularly following the shift to hybrid working arrangements as a result of COVID-19. The AICD recently promoted a cyber short course highlighting two potential options: high performing director; or cyber illiterate[iii].
Ethical capability – reputational risks continue to escalate with increasing societal expectations of financial institutions, corporations and governments alike. As such, skills in managing environmental, social and governance (ESG) risks and the ability to make the right ethical calls irrespective of black letter law is key.

Not all directors will possess every skill listed, however a strong foundation of all these skills should be present in the board as a collective.

Further to skills and competencies, board and director activities, attributes and behaviours are also critical to consider, as noted in a Governance Institute of Australia publication [iv]:

“A critical mindset is fundamental if directors are to assess and deconstruct situations and contribute effectively. Three dimensions (director competencies, board activities and director behaviours) must all work in conjunction with each other. No single component can stand alone.” - Dr Peter Crow, Board Advisor & Company Director

Attributes of an effective director

Having the right hard skills is not enough to be an effective director. The role also requires certain behavioural attributes (or soft skills), many of which can be learned. In fact, one could argue that these soft skills are used more often than hard skills when it comes to board discussions and decision-making.

To help identify the necessary attributes of an effective director, we sought insights from a couple of directors who sit on the boards of major superannuation funds, in addition to their directorship and executive roles with other organisations:

“To be an effective director you must have a genuine desire to act in the best interests of members. You must be able to think strategically and focus on material issues. You must display strong communication skills, be prepared to be an active contributor, and be able to listen to and respect alternate viewpoints. You must put the time and effort into building meaningful relationships with your colleagues, be generous in sharing your knowledge, and be willing to ask questions and spend the time required to become familiar with new topics. You must act with honesty and integrity at all times, show good judgement, and be prepared to be some or all of empathetic, decisive, courageous, resilient, humorous and cautious, as the situation requires. My experience is that I rely on my technical skills for about 30% of my directorship, and my softer skills for about 70%.” - Simone Thompson, Board Director, Togethr Trustees

“My top three critical skills, attributes and capabilities of an effective director are self-awareness, an enquiring mind and a commitment to learning. Effective directors have a level of self-awareness that enables them to develop productive relationships with limited interaction to effectively contribute to optimal decision making. They also have an enquiring mind and use their opportunity to ask questions at the Board table to seek deeper insights into the topic being discussed, not as an opportunity to make statements or demonstrate their own proficiency. In addition, effective directors are committed to learning and developing their governance skills and working knowledge of emerging concepts in an ever-changing world.” - Jocelyn Furlan, Board Director, Aware Super

The attributes highlighted by these directors are very much consistent with the key attributes promoted by the AICD for effective directorship[v]:

Genuine interest – in the organisation and the industry in which it operates.
Integrity – is honest, consistent and puts the organisation’s interests before their own.
Curiosity – asks the right questions at the right time when ideas or opinions are presented.
Courage – the confidence to speak up in the boardroom and challenge assumptions.
Interpersonal skills – the ability to interact effectively with their colleagues, includes emotional intelligence, communication skills, and negotiation skills.
Good judgement – makes informed and balanced decisions based on instinct and information available.
Active participation – proactively contributes to discussions and provides a perspective on issues.

Hall Advisory also considers the following attributes to be important:

Open-minded – respect for alternate views and perspectives, allowing for the exchange of ideas and discovery of new concepts.
Opportunistic – able to identify and support new opportunities with good risk/reward profiles and more effective organisational structures/approaches that may lie beyond the status quo.
Learning mindset – thirst for knowledge and new learning opportunities, including insights to be leveraged from internal subject matter experts and external specialist advisers.
Willingness to engage – interest and availability to engage directly with business representatives from time to time, to better understand and influence the true culture of the organisation.

Influence on organisational risk culture

The key director competencies covered in this blog should not. be considered in isolation. These skills and attributes have a flow-on effect to other aspects of the organisation, including risk culture. In our previous blog, Assessing risk culture for better organisational outcomes, we introduced Hall Advisory’s five pillars of risk culture for the purpose of performing risk culture assessments. The first risk culture pillar is risk leadership.

Risk culture starts with leadership. In every organisation, leaders are role models and set the tone for the rest of the organisation. Directors and executives influence and promote the desired risk culture of an organisation. Risk culture is also strongly linked to organisational performance and can either contribute to or undermine the organisation’s success. That’s why when assessing board composition, it’s important to not only consider the skills of each director, but also their individual attributes and the dynamics of the collective group.

Broader governance expectations

APRA regulated institutions including banks, insurers and superannuation funds also need to meet the expectations of the prudential regulator in complying with relevant APRA prudential standards. This is further to complying with the ASX Corporate Governance Principles and Recommendations (if listed) and observing good practices espoused by member organisations such as the AICD and the Governance Institute of Australia (as considered appropriate).

APRA completed a thematic review of governance in the superannuation sector in 2018, and their high-level observations included the following [vi]:

"• Many RSE licensees, in seeking to comply with Prudential Standard SPS 510 Governance (SPS 510) and Prudential Standard SPS 520 Fit and Proper (SPS 520), have adopted processes to ensure that individual directors meet minimum fit and proper requirements. However the majority do not go further to actively consider the optimal composition that is appropriate for the board as a whole, taking into account their strategic plan and the skills, capabilities and experience needed to effectively execute the plan;

• Better governance practice was demonstrated by RSE licensees with clearly articulated policies on optimal board composition, which addressed a range of relevant aspects including achieving appropriate diversity, policies on multiple directorships and current and expected future skills and experience requirements;

• Renewal policies and practices of some RSE licensees demonstrated a tension with the spirit and intent of SPS 510, for example by not requiring the board to take into consideration previous terms served on the board when assessing the period of tenure or not enforcing the tenure limits set out in the policy; and

• Board performance assessments that move beyond self-assessment, to include more objective and independent review, often through the use of external experts, are viewed by those boards as providing significant benefits through identifying means for improving the board’s performance."

Board, committee and individual director assessments

For board and director assessments, covered in more detail in our blog on Board performance and effectiveness assessments, there are six pillars to be considered. Again, the first pillar, duties and composition, is the most relevant when looking at the skills and attributes of an effective director. This pillar includes an assessment of director composition, skills and capabilities, to identify skills gaps and actively seek nominees with skills the board needs. In some cases, there has been insufficient focus on performing a thorough gap analysis of director skills and implementing actions to close gaps once identified. However, with the increasing focus on governance and culture, this has become a higher priority for boards.

Adequate assessment of board performance and effectiveness needs to be performed at both the individual and group level. Focussing on individual director assessment for the purpose of this blog, there are several tiers of assessment that can be performed to obtain a proper gauge of whether a director’s skills and attributes are appropriate for their role.

Self-assessment – directors can assess their own capabilities and skills using tools such as the AICD’s self-assessment tool, to identify their strengths and weaknesses and therefore guide professional development. Though this is a useful tool and one many directors should leverage, this isn’t enough on its own. Self-assessments tailored to the organisation’s context may also be conducted through the form of a questionnaire covering areas such as mindset, values, attendance and participation, contribution, and performance.
Peer assessment – directors assess the skills and attributes of their peers, what they offer to the board and overall decision-making. Responses can remain anonymous, with total scores calculated for each area assessed shared with the director.
Independent assessment – an objective assessment from a third-party to assess whether each individual director continues to be a good fit for the board and how they can continue to enhance their contribution.

How Hall Advisory can help

In respect of governance, some of Hall Advisory’s core services include:

Board performance assessments – assessing the effectiveness and performance of a board to identify strengths and areas for improvement.
Risk culture assessments – review of existing frameworks, surveys, and interviews to assess risk culture across all levels of the organisation, review of results to identify strengths and weaknesses, and recommendations to improve risk culture.
Organisation-wide independent assessments of governance, accountability, and culture standards.
Development, enhancement and implementation of effective governance and culture frameworks.
Board training.
Independent director and external committee member services.