What's trending: board skills and diversity reporting

Examining the ASX50's approach to board skills and diversity reporting 10 min read

A board skills matrix is a valuable corporate governance tool for listed entities to disclose the skills of their directors, identify gaps and competencies in addressing current or future business needs, guide succession planning and promote informed decision-making regarding director elections and re-elections. Similarly, entities use board diversity reporting to highlight the varied backgrounds, perspectives and experiences across an entity's board, giving stakeholders increased transparency into a board's composition.

In this Insight we:

• Examine key trends in board skills and diversity reporting across Australia's top 50 ASX-listed entities by market capitalisation ¹ (we expect to see similar trends across all ASX-listed entities).
• Provide an update on proposed changes to the ASX Corporate Governance Council's Corporate Governance Principles and Recommendations (4th Edition, 2019) (ASX Recommendations) regarding board skills and diversity reporting.
• Explore how the top 50 ASX-listed entities satisfy the ASX Recommendation to disclose a board skills matrix each year.
• Consider next steps for boards.

Key takeaways

• Proposed changes to ASX Recommendation 2.2: As part of the consultation materials for the fifth edition of the ASX Recommendations (Proposed Fifth Edition Changes) released on 27 February 2024, the ASX Corporate Governance Council (Council) has proposed a new recommendation that a listed entity disclose the process for how the entity assesses the relevant skills and experience held by the entity's directors. In addition, the Council has proposed amendments that recommend that an entity's board skills matrix clearly distinguish between skills the board currently has versus skills it is looking to achieve in its membership (currently, an entity can disclose the skills that the board currently has or is looking to achieve).
• Greater disclosure of directors' degree of skill: ASX-listed entities currently present their board skills matrix using one of three reporting styles – collective, binary and graded reporting. A growing number of entities are using the graded reporting style, which discloses the degree to which directors have a particular skill, reflecting a shift towards greater transparency in board skills reporting.
• Objective evaluation: ASX-listed entities are increasingly disclosing they have undertaken an external assessment of their board skills matrix and objective evaluations of board and director performance against the entity's matrix. Objective evaluation processes (and disclosure of these processes) can assist entities in responding to shareholder activist campaigns that seek to target board composition and skill gaps. The Proposed Fifth Edition Changes to ASX Recommendation 2.2 (described above) may result in a further increase in the number of entities employing and disclosing the use of external evaluation procedures.
• Key emerging skill areas: Boards are increasingly disclosing skills in areas such as technology, digital disruption, data, artificial intelligence, ESG, climate considerations, cybersecurity and supply chain expertise. ASX-listed entities are recognising the importance of these skills to address emerging areas of business risk and opportunities and are actively working to address skill gaps.
• Proposal to insert a new ASX Recommendation 2.3: As part of the Proposed Fifth Edition Changes, a new ASX Recommendation 2.3 will be inserted, which provides that, if a board is considering any relevant diversity characteristics (beyond gender) for its board membership, it should disclose those diversity characteristics.
• Greater board diversity reporting: In line with the Proposed Fifth Edition Changes to ASX Recommendation 2.3, we are already seeing an increase in ASX-listed entities measuring and communicating the diversity in the composition of their boards beyond the prescribed areas of gender and tenure, with some ASX-listed entities reporting on other diversity metrics such as ethnicity, nationality and geographic location in 2023.

Background

Board skills reporting

ASX Recommendation 2.2, in its current form, recommends that listed entities prepare and disclose a board skills matrix each year, setting out the mix of skills that the board currently has or is looking to achieve in its membership.

On 27 February 2024, the Council released consultation materials for a proposed fifth edition of the ASX Recommendations (being the Proposed Fifth Edition Changes). In particular, the Council has proposed that a second limb be added to ASX Recommendation 2.2, which recommends that a listed entity disclose its process for how the entity assesses the relevant skills and experience held by the entity's directors. The proposed amendments to Recommendation 2.2 also recommend that an entity's board skills matrix clearly distinguish between skills the board currently has versus skills it is looking to achieve in its membership (currently, an entity can disclose the skills that the board currently has or is looking to achieve).

The current ASX Recommendations (and the Proposed Fifth Edition Changes) do not prescribe any specific format for a board skills matrix, nor do they recommend the types of skills that should be included in the matrix. This recognises that an entity's matrix will need to be tailored to the circumstances and requirements of the relevant entity, which may change over time. As a result, various practices have emerged over recent years.

Board diversity reporting

Although the current ASX Recommendations do not recommend board diversity reporting beyond gender diversity, the Proposed Fifth Edition Changes to ASX Recommendation 2.3 would, if adopted, recommend that, if a board is considering any relevant diversity characteristics (beyond gender) for its board membership, it should disclose those diversity characteristics. This is in addition to existing ASX Recommendations regarding disclosure of measurable objectives for achieving gender diversity in board composition and progress towards achieving those objectives.

Methodology

Our observations are based on our analysis of board skills matrices published by the ASX50 since 2021² and our experience working with listed entities in this space. In addition, we reviewed board diversity metrics disclosed by the ASX50 since 2021 in their corporate governance statements and/or annual reporting suite.

Board skills reporting – observations and trends

Greater disclosure of directors' degree of skill in board skills matrices

In the absence of a prescribed format for a board skills matrix, entities have the discretion to present their board skills matrix in any style, provided that the matrix lists the skills that the board currently has or is looking to achieve in its membership.³

Amongst the ASX50, we identified three reporting styles:

Since 2021, the proportion of ASX50 entities that have adopted the graded reporting style has increased year-on-year, with a consequential decline in the use of the binary and collective reporting styles. In 2023, approximately 45% of the ASX50 adopted a graded reporting style, followed by approximately 40% adopting the binary reporting style and approximately 15% adopting the collective reporting style. This shift towards more fulsome disclosure may, in part, be due to a change in stakeholder expectations, with investors seeking greater transparency around the capabilities and expertise of the board.

Although the graded reporting style generally lends itself to greater transparency, the terminology used to 'grade' directors varies as between the ASX50. Given the different approaches, what may constitute a 'high' grade for a director at one entity may not be equivalent to a 'high' grade for a director at another entity. Further, some entities that use binary reporting do so on the basis that a director is only counted as having a skill if they have extensive experience and knowledge in that area.

The below table sets out some examples of the terminology used by those ASX50 entities that have adopted the graded reporting style.

We anticipate that more ASX-listed entities will adopt the graded reporting style when reporting on board skills in the coming year, as disclosures become increasingly transparent and sophisticated.

Various approaches adopted to assessing the board against disclosed skills

Unsurprisingly, the criteria used to assess the skills and competencies of the board (as a whole) and the individual directors also differ across entities. Entities are not currently required to disclose how they evaluate whether a director possesses a skill for the purposes of preparing their board skills matrix. If the Proposed Fifth Edition Changes to ASX Recommendation 2.2 are adopted, entities which have historically made no, or limited, disclosure of the processes undertaken to assess the relevant skills and experience held by their directors, will (if they wish to comply with ASX Recommendation 2.2) need to provide more fulsome disclosure of those processes. 

At present, entities will generally use one or more of the following approaches:

• Self-assessment by each director against a questionnaire.
• Assessment of each director by the chair of the board, a nomination committee or some other form of internal review.
• External third-party review or application of external research.

Interestingly, a small proportion of the ASX50 disclosed that they undertook an external review of their board skills matrix and/or directors' performance against the entity's matrix. In 2023, approximately 8% of the ASX50 reported that they used an external expert or applied external research to prepare their board skills matrix and/or assess the capabilities and expertise of their directors against that matrix (compared to approximately 2% in 2021). In actuality, we would expect these percentages to be higher since some entities may have chosen not to disclose their evaluation processes, including the use of an external expert or applied external research, as part of their reporting.

Given the Proposed Fifth Edition Changes recommend that entities disclose the process for how directors are assessed, we expect more ASX-listed entities will undertake external assessments of their board skills matrix and objective evaluations of board and director performance. These types of objective evaluation processes and disclosure of those processes may assist entities in responding to shareholder activists who target the re-election of directors based on perceived skill gaps or activist campaigns that seek to have an independent director elected to the board to fill a perceived skill gap.   

No change in the average number of skills reported

A key observation across the ASX50 has been that the average number of skills included in board skills matrices has remained consistent year-on-year since 2021. On average, boards were assessed on 12 skills (within a range from seven skills up to 35 skills). The fact that boards seem to regularly report on an average of 12 skills demonstrates a shared understanding across boards regarding the fundamental skills required of their directors.

Core skill and key emerging skill areas

Core skills that broadly appear across the board skills matrices of the ASX50 include:

• leadership
• governance, risk and compliance
• strategy
• financial and commercial acumen
• people and culture.

Entities will then build out these types of core skills with additional skills, as appropriate to the nature of that entity's business and the industry or sector in which they operate.

Below are some of the key emerging skills disclosed by the ASX50 since 2021. Notably, many of these skills are in areas that are seen in the market as emerging risk areas for businesses. This, in part, explains the need for directors to hold these skills, so they are adequately equipped to oversee and manage these business risks as and when they arise.

If the Proposed Fifth Edition Changes to ASX Recommendation 2.2 are adopted such that entities are required to disclose the mix of skills the board is looking to achieve in its membership, we expect that many of the emerging skills identified below will be skills that boards are looking to bring into their mix of skills in future (to the extent they are not already). 

Key sector-specific trends in skills included in board skills matrices

There are often commonalities in the skills listed in a board skills matrix for entities within specific sectors (beyond merely similarities in skills regarding expertise in that relevant sector). For instance:

• all ASX50 entities in the healthcare sector include in their board skills matrix skills relating to technology, digital disruption and innovation;
• all ASX50 entities in the energy and resources sector include in their board skills matrix skills relating to either climate and environmental concerns and/or community-related issues and social responsibility; and
• cybersecurity was a skill listed in the board skills matrix of more than 75% of the ASX50 in the banking and finance sector.

These sector-specific trends highlight how some skills have more relevance to boards of the ASX50 operating in a specific sector, rather than a fixed group of skills being appropriate for all boards.

Diversity reporting – observations and trends

Similar to board skills reporting, board diversity reporting can provide meaningful insights into the varied backgrounds, perspectives and experiences across a board, giving stakeholders increased transparency into a board's composition.

Based on our review of the board diversity metrics disclosed by the ASX50 in their corporate governance statements and/or annual reporting suites, we observed the inclusion of a number of board-specific diversity metrics, beyond the prescribed metrics of gender and tenure.⁴ Diversity metrics such as ethnicity, nationality and geographical location are now disclosed by an increasing proportion of the ASX50. For example, approximately 10% of the ASX50 reported on ethnic and geographic diversity of their board in 2023. In a significant evolution of diversity metrics, at least one entity in the ASX50 included, for the first time, LGBTIQA+ representation in its board diversity reporting in 2023.

As noted above, the Proposed Fifth Edition Changes to ASX Recommendation 2.3 would, if adopted, recommend that, if a board is considering any relevant diversity characteristics (beyond gender) for its board membership, it should disclose those diversity characteristics.

In light of the Proposed Fifth Edition Changes, increased stakeholder focus on reducing diversity gaps, and greater understanding of the benefits that flow from having diverse experience, backgrounds and perspectives on a board, we expect to see an increasing number of ASX-listed entities reporting on other relevant board diversity metrics, in addition to the usual disclosures around gender diversity and tenure. Of course, the desire for any increased disclosure will need to be balanced with director privacy considerations and whether directors are comfortable disclosing to the public the personal information that forms part of these diversity characteristics.  

The future of board skills and diversity reporting

As board skills and diversity reporting continues to evolve, with a greater focus on more fulsome, informative and transparent disclosure, we expect to see:

• more ASX-listed entities adopting the graded reporting style;
• with the Proposed Fifth Edition Change that ASX-listed entities disclose their process for assessing directors' skills and experience:
  • potential standardisation (in some areas) of the 'scorecard' that is used by entities to grade their respective directors' capability and expertise (for example, the expectation that 'high' competency for the 'financial acumen' skill may require a director to have held a CFO position and/or hold an accounting accreditation); and
  • more ASX-listed entities undertaking external assessments of their board skills matrix and objective evaluations of board and director performance against the entity's matrix; and
• with the Proposed Fifth Edition Change that ASX-listed entities disclose relevant diversity characteristics they are considering for their board membership, more ASX-listed entities disclosing a range of other board diversity metrics beyond gender and tenure.