Director competency and skills, tenure and capacity continue to be of on-going debate inside and outside of boardrooms. The financial press this week continues the debate.
Stephen Howell, Director and Principal Advisor at Effective Governance, the governance practice of HopgoodGanim Lawyers, says these are not difficult concepts and showcases his APRA-regulated clients as complying with APRA’s proposals.
APRA’s Governance review: Discussion paper (March 2025) proposes changes to the regulator’s requirements on the governance of banks, insurers and RSE licensees. The first proposal (see below) relates to board skills analysis and using this analysis to build and establish a skills-based board.
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Proposal 1 ‒ Skills and capabilities Regulated entities to:
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Prudential standards CPS 510 and SPS 510 (Governance) currently require boards to collectively have the necessary skills, knowledge and experience to manage regulated entities appropriately; however, these entities have discretion as to how to comply with this requirement and APRA has observed shortcomings in the effectiveness of the processes used to identify board skills and address any gaps, including:
- adopting a vague or a narrow view of necessary skills and capabilities, including a failure to specify expected experience, qualifications or behavioural capabilities – and failing to consider how these can be measured;
- failure to specify minimum skills and capabilities that individual directors need to fulfil their role;
- not verifying skills or capabilities, often relying heavily on self-assessments; and
- failure to take steps to address gaps and weaknesses through professional development and succession planning.
APRA notes in the discussion paper that this is: ‘most prevalent among small banks and parts of the superannuation sector’. Thus, its proposal is designed to raise minimum standards for boards and directors in the financial sector and allow APRA to hold regulated entities accountable for the ‘calibre and development of their boards.’
The APRA proposals do not come as a surprise to Effective Governance, in fact they are supported. We have consistently provided leading practice advice to our board clients, advice which continues to be in lockstep with corporate and prudential regulators. We have developed director competency assessment frameworks and board skills matrices to suit each client’s business, industry/sector and regulatory environment to support optimal board performance and to deliver on strategy and organisational oversight – this includes many of our APRA-regulated entities.
Our skill analysis process, which culminates in a skills matrix, is designed to:
- identify the areas in which individual directors have specific skills, areas in which they provide their most valuable contributions and any areas for improvement;
- provide an opportunity for the board to have a facilitated discussion on the results of the assessment;
- document the competencies that each director brings to the board, by establishing a skills matrix;
- identify competency gaps in the current board composition that may inhibit achievement of the strategic direction;
- identify skills and competencies, relevant to strategy, to assist in future director recruitment;
- identify opportunities for director professional development to enable existing board members to achieve the required levels of competency; and
- provide a structured framework for a fit and proper discussion at both the individual and board level in compliance with relevant regulatory frameworks; and utilise the framework to assess competencies in four areas of competency: industry, technical, governance and behavioural.
If you would like to discuss how we can help your board undertake a skills analysis and develop a comprehensive skills matrix, please contact Stephen Howell at stephen.howell@hopgoodganim.com.au or on 0411 549 164.