How do you assess the competence of directors?

by Leon Gettler | |   Leadership
How do you assess the competence of directors?

The competence of directors is essential for CEOs running good companies.

The role of the board of directors has increasingly come under scrutiny in light of corporate scandals such as those at Enron and WorldCom where the board of directors failed to act in investors' best interests. In theory, the board is responsible to the shareholders and is supposed to govern a company's management. The reality however is that the relationship between a board and CEO is critical to governance effectiveness and organisation performance. Company performance and governance go out the window when boards are captive to the CEO or where the relationship breaks down. And there are concerns about directors micro-managing or not running things effectively because the directors have different views. So how does one assess directors?

The lawyers at Coleman Grieg say directors should know how any proposed actions will affect the company’s performance, particularly if it involves a significant sum of money. They also have to know how to get appropriate legal and accounting advice when needed, how to take an active role in directors’ meetings, talk to managers and staff about how the business is performing and ensure that they have access to up-to-date financial data that can be used to assess the company’s performance. They have to act honestly and carefully, know what the company is doing and take care when handling other people’s money. Most importantly, they have to make sure the company can pay its debts and ensure that proper financial records are kept. At all times they have to act in the company’s best interests and use any information gained through the director’s position properly and ethically.

James Beck from Effective Governance recommends doing a boards skills analysis, identifying gaps in skills and diversity, highlighting the strengths around the boardroom table to enable the directors’ skills to be utilised to their fullest potential, identifying potential professional development opportunities for board members and informing the recruitment process for future board members.

He says there are four areas to consider for director competence their experience in and knowledge of the industry in which the organisation operates, their technical / professional skills and specialist knowledge to assist with ongoing aspects of the board’s role, their level of essential governance knowledge and understanding that all directors should possess or develop if they are to be effective board members. They need specific technical skills as applied at board level. They have to know how to function as team members and interact with key stakeholders.

“Directors must all be aware of, and comply with, legal, ethical, fiduciary and financial responsibilities. On a practical level, this means being able to understand company balance sheets, profit and loss accounts, sources and methods of funding, cash flow and other financial data. In particular, ideally all directors should be financially literate - that is, they have the capacity to scrutinise the content of their organisation’s accounts to ensure accuracy. It also means knowing the legal responsibilities of directors. These include familiarity with company law, contract law, and competition and consumer law, as well as the relevant industry and company codes of practice. Clearly, individuals will possess a greater degree of expertise in some areas than others, but breadth of experience and the preparedness to develop it further are the key requirements for any director.”

How do you assess directors?