OPINION | From outside the boardroom, it can be difficult to gauge how individual directors are functioning and how cohesive a board is. As investors, what can we use to measure their performance against?
There’s no magic answer, but we can weigh what we know against a set of criteria.
For a start, a great board would have experience; skills; diversity of age, thought and gender; based on the belief that skilled and suitably diverse boards make for better-governed companies.
Studies from around the world have confirmed that these boards and companies do better than those who’ve stuck determinedly to the ‘pale, male and stale’ recipe.
The Australian Council of Superannuation Investors (ACSI) is interested in this because it flows into higher value investments for our member funds.
Its directors would have some skin in the game – owning shares themselves aligns them more closely with investors and outside shareholders.
One of the tools we can use to measure all this is ACSI’s long-running study into the makeup of boards and pay of directors in Australia’s top companies.
Women on the rise
Every year for the past 15 years – the same amount of time in which we’ve been engaging with boards on behalf of our members – we’ve released Board Composition and Non-Executive Director Pay in the Top 200 Companies.
It’s the most comprehensive study of Australia’s largest boardrooms, mapping and analysing changes in director roles, gender, fees, tenure, age and directors’ shareholdings, and the latest, which looks at 2015, shows that an influx of women directors who are younger than their male counterparts isn’t stopping Australia’s boards from getting older.
Women directors are around six years younger than their male counterparts, yet the average age of directors has actually risen in the past decade and a half, from just over 58 to nearly 62.
Why is this the case? The research shows that while women are bringing some generational change to the boardrooms, there is a large cohort of the men – 14 per cent – who are over 70. In fact, two out of three male directors are over 60, compared to one out every three female directors.
In 2015, 21 per cent of the ASX200 directorships were held by women. This year, that’s up again, with almost a quarter of all board seats occupied by women – and ACSI is intent on working with our membership in raising that to at least 30 per cent by the end of 2017.
ACSI’s members have recently endorsed a voting policy for 2017 that will reject male board candidates from companies with no women directors if those boards have not committed, or articulated, a way forward to review and renew their makeup.
In 2016, the ASX100 is on the cusp of reaching the 30 per cent target – when our study began 15 years ago, ASX100 boards were 91 per cent male.
Skin in the game
A good board also has directors who invest in the company they preside over. Opinions differ as to how much that stock should be worth, but an emerging rule of thumb has it that non-executive directors should have invested an amount equivalent to at least one year’s director fees, and some companies are now implementing minimum director holdings measures.
And according to our research, it seems companies are responding to investor concerns, with the number of ASX100 directors with no personal equity in their companies falling by a third, to only 51 people. Half of those had only been on the board for less than a year, so the timing may not have been right for them to buy as yet, but nine directors with no shares had been on their respective boards for more than five years – one of them, for nearly 20 years.
Other things that make a board great are not as tangible, nor easily measured.
They must set, monitor and exercise control over the corporate culture of their company. The recurring refrain ‘a few bad apples’ or ‘rogue individuals’ is not one that should be heard at a company with a strong board.
They must set, monitor and exercise control over executive remuneration, and ensure, for a start, that large bonuses aren’t handed out as a matter of course.
Bonuses in the firing line
In our CEO pay study this year, we found that in 2015, 93 per cent of CEOs in the ASX100 received a median 76 per cent of their maximum bonus. That seems to be trending in a direction that is less a ‘bonus’ and more ‘just part of the package’.
They must be on top of new technology and the risks associated with it; they must know the carbon risks facing their business and take measures to abate those risks.
And they need to consider the long term, something that can be overlooked by management in the day-to-day running of the company.
It sounds like a big ask when it’s listed like that, and it’s true, it is a big ask. Directors of listed companies have enormous responsibility. But the retirement savings of millions of Australians are invested in the companies they lead, and I can’t think of a better reason for boards to strive for excellence.
Louise Davidson is the chief executive of the Australian Council of Superannuation Investors.