Drive for Wider Board Diversity Challenged by Trend for Smaller Boards
LONDON, April 23, 2013 /PRNewswire/ --
- New Report Identifies Global Standards and Emerging Trends for Effective Boards
- Major new study into global boardroom composition and culture investigates how board structures are changing
- Across the globe, boards are becoming smaller - and smaller boards tend to deliver better share price performance
- Diversity, in the widest sense, is key to an effective board
- Companies with a higher ratio of executive directors to non-executive directors (NEDs) tend to perform better and NEDs who come from a different sector or who are CEOs elsewhere are also key to successful performance
- The 'shareholder spring' has been over-stated and positive engagement between shareholders and boards is more evident
A move towards smaller boards is making boardroom diversity an ever-more challenging objective, according to a major new report released today (Monday 22 April 2013) by global law firm Eversheds. The study demonstrates that, although companies with smaller boards tend to deliver better share price performance, chairmen and nomination committees will have to balance size with a number of other important factors shown to demonstrate better share price performance, such as appointing more executives to boards and encouraging greater diversity in the broadest sense.
The 'Eversheds Board Report: The Effective Board' is a global study that analysed the share price performance of over 500 top companies in Europe, the US, Asia-Pacific, the Middle East and Brazil between 2011 and 2012 to investigate the characteristics of global boardrooms. The report also reflects in-depth interviews with 85 senior board members from around the world. It follows the first Eversheds Board Report published in 2011, the first study to compare board composition and share price performance with research going back to 2007.
The report highlights global trends in board composition over the past five years, particularly a trend towards smaller boards, with this development consistently related to better company share price performance across international regions and industry sectors. The study found that boards are now 8% smaller on average when compared to five years ago, with the greatest change taking place over the last three years, down 7% from 2009 to 2012. This decrease in board size has also had the effect of placing greater demands on each NED. Nearly all board directors (93%) interviewed for the report believe that an effective board should have less than 12 members.
The study found that diversity is key to successful boards; with a significant majority of board directors (61%) believing that diversity in the widest sense has an important impact on board performance. This includes diversity of skill sets, expertise outside of sector, international experience, age and background as well as gender. This focus on diversity, when combined with shrinking board size, means that decisions on board composition are becoming an increasing challenge for chairmen and nomination committees.
The study also identified that companies with a higher number of executive directors on their boards tended to have a better share price performance, as did companies having more directors on the board with experience of a different industry sector. Notwithstanding the link between diversity of sector experience and better performance, the trend has been to recruit NEDs with same industry sector experience in every region except Hong Kong. This is despite the fact that half of the directors interviewed recognised that diversity of sector experience assists performance and could combat "group think".
John Heaps, chairman at Eversheds, comments:
"Since the first Eversheds Board Report was published in 2011, increased media attention and challenging economic conditions have meant that boards have been subject to greater scrutiny. Balancing strategic growth decisions against a myriad of risk factors and tougher regulation is the challenge for boards across the globe in 2013.
"Against this backdrop, we wanted to provide further insight into what makes an effective board. Our new report looks closely at the changing composition of the Board, the characteristics of boards of better performing companies, shareholder engagement and management of risk. We believe that the findings of our second Board Report will make a valuable contribution to the debate on what makes for good corporate governance in the boardroom.
"It is encouraging that our research reveals that diversity is still a key priority, with directors now moving the debate beyond gender to also encompass diversity of age, sector and skill sets as well as international experience. However, the trend towards smaller boards means that achieving this diversity is becoming an increasing challenge."
The issue of gender diversity in the boardroom was also investigated in the global study, and the findings highlight that in the last five years, there has been a 50% increase in the percentage of female directors on boards across all regions. That said, this increase is against the context of a low base and the appointments of women are mostly of a non-executive, rather than executive, nature. The largest increases were in Europe (156%) and in Hong Kong (133%).
The so-called 'shareholder spring' has generated a lot of media interest. However, the study shows that this has been somewhat overstated and the reality is that there is evidence of more positive engagement between shareholders and boards. Only 14 out of 140 companies analysed received less than 80% shareholder approval for their executive remuneration packages, with the average shareholder approval percentage standing at 90%. The majority of directors interviewed recognised that shareholder engagement does have an impact on board strategy and remuneration, and recommended early engagement on difficult issues. One of the reasons cited for this high level of shareholder support was prior proactive dialogue between the board and shareholders.
To request a copy of 'Eversheds Board Report: The Effective Board', please visit: http://bit.ly/YZtn6n.
Notes to editors
About the 'Eversheds Board Report: The Effective Board'
The first Eversheds Board Report was published in 2011 and provided an insight into the relationship between board composition and share price performance of some of the largest companies across the globe, both during and after the financial crisis, covering the period for 2007 to 2009.
For its second global study into the composition of boards - the 'Eversheds Board Report: The Effective Board' - Eversheds seeks to provide further insight into what makes an effective board. The global law firm has updated and expanded its empirical research to undertake a close analysis of the boards of the top companies in the UK, Continental Europe, USA, Asia-Pacific, the Middle East and Brazil. The report also analyses share price figures and incorporates in-depth views from over 100 senior board members from around the world.
About Eversheds LLP
Eversheds LLP and its worldwide offices have over 4,500 people who provide services to the private and public sector business and finance community. Access to all these services is provided through 43 international offices in 26 jurisdictions. Eversheds combines local market knowledge and access with the specialisms, resources and international capability of one of the world's largest law firms.
SOURCE Eversheds
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