Blair Jones featured in Agenda, “Board Skills Matrix Disclosure Growing”
In a subtle effort to preemptively fend off criticism about board composition, more companies are publishing cleaned-up versions of the skills matrices directors use internally for recruiting purposes in their proxy statements.
A September report published by Equilar found that the number of S&P 500 companies that published a board skills matrix nearly doubled from 2015 to 2016. This year, 63 companies — 12.6% — published a skills matrix, which typically takes the form of a chart with skills along a horizontal axis and directors’ names listed vertically. Directors with certain skills have check marks next to their names. The most commonly listed skills include finance, international, industry or leadership experience; marketing or public relations; government or public policy; technology and risk management.
Disclosing a director skills matrix is thought to help boards provide more information to investors about board composition and to show that boards keep a careful watch on the blend of skills the board can utilize to support management. Still, while the disclosures themselves are generally viewed as a step in a positive governance direction, some experts question the value of publishing skills matrices. Experts also point out several challenges in doing so.
Brink Dickerson, a partner with law firm Troutman Sanders, says the purpose of publishing a skills matrix is to advocate more strongly for director candidates by further describing how the mix of skills among directors on the board is tailored to the needs of the company. The disclosure can help stave off the criticism that board members “are just a bunch of old cronies who do not have the very targeted skills that you often see with the candidate proposed by shareholder activists,” he writes in an e-mail.
In addition, Blair Jones, managing director at Semler Brossy, points out that investors are starting to expect that companies will provide these disclosures. Investors could take information presented in directors’ biographies and create their own skills grids, but Jones says companies should take disclosing skills matrices as an opportunity to tell “their own story” about how boards are composed. Semler Brossy provided commentary for the Equilar report.
Jones says many investors view governance structure as a factor that can influence performance, and investors want to be sure that boards are doing everything they can to help companies achieve the best returns. At this point, some of the disclosures “may be a little light,” says Jones, but it’s likely that skills matrix disclosures will become more meaningful as companies put more thought into conveying the information investors want to see.
The skills matrix disclosure could also come in handy if a board is targeted by an activist or if a group of investors seeks to nominate a director candidate using proxy access rights.
“The reason that dissidents try to put alternate slates together is because they have questions about whether the board is being governed well,” says Jones.
It’s not so much that disclosing a skills matrix prevents those questions from being asked, but the process that results in the disclosure — thinking through the skill sets the board has and will need in the future and using that information to continue building the board — has become a sticking point for investors.
“If a board is doing that right, they’re less of a target for dissidents of any kind, whether through proxy access or activists,” says Jones.
Yet, while the disclosures appear fairly straightforward, often taking the form of a graphic that takes up less than half a page, they can be difficult to formulate.
Dickerson says describing directors’ skills accurately and succinctly can be a “slight challenge,” he writes in an e-mail.
“Retired executives tend to recall their experience in a more expansive and flattering manner than one might hope,” he says.
Lawyers will usually take a “first pass” at describing a director’s skills based on their biography and then send a draft to the director candidate as part of the annual D&O questionnaire to get feedback.
“The edits that the candidate sends back can be helpful,” says Dickerson, “but often they are tedious and self-serving expansions of the descriptions that add little value and are politically challenging to edit.”
Nancy Wojtas, a partner at law firm Cooley and head of its public companies group, says directors are sometimes vexed when the categories listed in the skills matrix don’t include their relevant skill sets. If a director can only check two columns, for instance, and a fellow board member is checking off eight columns, that can be “a personal embarrassment,” she says. Yet, the check marks reflect the skills listed in the matrix and are often reflective of what the board wants to articulate. Wojtas says some companies choose to focus on diversity, financial experience, strategic initiatives, marketing or fund-raising.
“It really just depends on how you articulate the specialties in the matrix,” Wojtas says. “But that is the reluctance that I have discovered as a reason why boards don’t like it published in proxy statements.”
Still, Wojtas says that in an activist situation in which a board needs to demonstrate why the current board members are the most competent, showing the various areas of expertise becomes a crucial step. Plus, Wojtas says that in her experience, directors don’t quibble when they hear the criteria for a skill being attributed to a director in a matrix.
As it becomes more common for companies to provide these disclosures, it will likely become less of an issue for a director to be shown having fewer skills than other board members, particularly when the skills certain directors bring to the boardroom are highly prized.
For example, Anadarko Petroleum published a director skills matrix for the first time in March, and in addition to listing 15 areas of expertise such as exploration and production (E&P) operations experience, E&P service experience and commodity marketing expertise, the board used filled-in semicircles and circles to show whether a director is “moderately active” or “very active” in a given area. The director with the fewest filled-in circles is Sean Gourley. However, Gourley’s area of expertise is in big-data analytics and artificial intelligence; he’s also a physicist and political advisor and has founded successful start-ups in Silicon Valley.
Ultimately, however, Dickerson questions whether skills matrix disclosure is meaningful. He says one of its shortcomings is that it’s “largely superficial, often providing no more insight than what can be garnered from the candidate’s biography.” For instance, if a director candidate is a former chief financial officer, he says, it’s “pretty obvious” that the director will provide financial, accounting and analytical skills as a board member.
He also says some directors reach misguided conclusions about such disclosure, including thinking that a board needs to have every skill set filled. While that may be true about skills such as financial expertise, “it’s not at all clear that every board needs a human resource (or compensation) expert, an international trade expert, or a financial engineer such as a former investment banker.”
What’s more helpful than a skills matrix, says Dickerson, is a process in which boards recruit new directors with specific missing skills or directors with skills in areas which the board is underweight, rather than jumping at the chance to recruit a recently retired CEO or a “marquee director,” he says.
“Rather than seeking to rationalize the directors that it has, [a board] seeks to fill future vacancies in a more thoughtful way,” says Dickerson.
“The proxy statements following this model will describe this process and frequently will have a chart listing the skill and which candidates fulfill them. Typically there are fewer words, but more substance in this approach.”