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Directors` selection and recruitment: the Matrix of Skills

Lawrence Trautman discussed, in a paper published in July 2012, (1), about the attributes and characteristics of directors, and the recommendations a company should follow when deciding on the composition and structure of its board.

A first advise the author offers to those building a board, is to consider certain variables: (i) the company life-cycle stage (ii) its international footprint in the future (iii) its technology dependence profile and (iv) its capital needs. More generally, the choice of a board sits on an established and communicated strategy for the firm, he says.

As Trautman says, the first clear mandate directors generally have, (even if legislations differ), regards their duty of care and loyalty to the company and its shareholders. The business judgement rule protects directors when deciding and acting in good faith, in an informed and responsible manner. Somehow this also affects the Nomination Committee members in their responsibility to foresee the directors`s succession.

Secondly, according to the author, every board has the same fundamental needs (a charter for the committee charged with nominations; independence and external advice).

A director nomination process starts with a selection of personal attributes nominated director should have, among which we can spotlight ethical behavior, availability and time flexibility, personal and professional achievements, interpersonal skills, independence and soundness of judgement. Also director need to demonstrate some experience features, (general business and industry knowledge, financial acumen etc).

We will not analyse in depth Trautman`s view on board composition and board committees`s structure, that he explains brilliantly, nor the role of the lead director, nor the actual corporate governance demographics. We will nevertheless focus in a tool for optimizing the directors`s selection process:

The Matrix of directors`s skills.

Trautman recommends to set the desired skills in the vertical axis in the matrix, starting for the most required or needed. The must-haves, those needed for the future, (due to retirement, to their current inexistence, or for the firm`s evolution). This exercise implies a previous and clear vision of the strategy and enough discipline in the process.

Which are the Must-haves?

a)      Independent directors for the Audit, Nomination and Compensation Committees, plus Audit and financial expertise for the first one, (preferably Chairman plus an eventual successor).

b)      Business and Corporate Governance experience and education, that allows to guess a board has a sufficient level of understanding of directors`legal duties and responsibilities

c)      Strategic planning, which is often critical for corporate success.

The next list of skills needs to be adapted to every firm, and cannot be exhaustive in a general description, but some of them can be outlined:

a)      Industry Experience; as evident as it might be, boards need to determine the industry, narrow or broad, present or future, and decide how much presence of so defined industrial expertise they need,

b)      Bankruptcy and turnaround expertise; when a company is in such a situation, or could be as a result of an acquisition, or simply because it could buy assets from companies in distress, these skills would be most needed,

c)      Capital markets expertise, that can be differently deployed in early stage firms, (where capital formation is at stake) or advanced stage firms, (where investor relations, securities and capital markets expertise is needed).

d)      Change agents

e)      And so many others as a particular board could need, (the author names many of them, among which diversity, international experience, and so on).

The horizontal axis will be filled with the different directors and/or candidates, so that in each case the presence of the different attributes would be counted. This helps the firm evaluate the board`s possession of the necessary skills, the need for compensating deficiencies, and the adequacy of the different candidates to the particular firm/time/stage/etc.

Selecting directors is a process where directors need to apply their best effort so as to fulfill their duty of care. The matrix of skills can be a fantastic tool to that end, introducing some discipline and Cartesianism, although discussions while using it should remarkably enrich the results .

 

 

(1) Trautman, Lawrence J., The Matrix: The Board’s Responsibility for Director Selection and Recruitment (February 3, 2012). Florida State University Business Review, Vol. 11, 2012. Available at SSRN: http://ssrn.com/abstract=1998489

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  1. February 14, 2015 at 9:12 pm

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