The makeup of a company’s board, believe it or not, can have a meaningful impact on a company’s performance.
For example, companies that have the same person serving as both chairman and chief executive typically report about an 80 basis-point lag in return on assets, according to an analysis by Bloomberg Intelligence. Additionally, companies that have directors with a range of tenure—from those recently appointed to long-serving board members—usually post the best share-price performance.
While correlation doesn’t always mean causation, facts like these arguably mean investors should pay special attention to corporate governance—the “G” factor in ESG (environmental, social and governance)—when deciding what stocks to buy.
Bloomberg Intelligence has introduced the “board composition score” to evaluate companies on four evenly-weighted issues: diversity (gender and age), independence (board leadership and director independence), refreshment (entrenchment and balance of tenures), and director roles (the potential “overboarding” of directors, chairmen and CEOs).
The boards of retailer Lululemon Athletica Inc., gold miner Newmont Corp. and software developer Autodesk Inc. stand out for providing diverse perspectives and proper management oversight, said Rob Du Boff, a New York-based ESG analyst at BI. Companies that scored low in this category include Berkshire Hathaway Inc., Liberty Media Corp., Southern Copper Corp. and Dillard’s Inc., he said.
“The presence of diverse and independent perspectives, unencumbered by an excess of outside commitments and continually refreshed, enables a board to add value in setting and overseeing critical strategic decisions at any company,” Du Boff said.
Lululeman, Newmont and Autodesk split the roles of chairman and CEO, have boards that are at or near gender parity, and have few long-tenured (10-plus years) directors, he said. The three companies also appointed a new chair in the past five years and have no directors who serve on more than three other public-company boards (thus avoiding the aforementioned overboarding).
Being on too many boards can decrease the attention directors pay to a company and ultimately damage stockholders. (The National Association of Corporate Directors found that public company directors devoted an average of 278 hours to preparing for and participating in a company’s board meetings in 2014, up 46% from 2005.)
The three-year total return of the Bloomberg World Index demonstrates a correlation between company deterioration and when the average number of additional seats a board member holds exceeds 1.5. The track record for companies where the CEO sits on two or more additional boards is significantly worse than when she sits on one or less.
Bloomberg’s board composition score picked out U.S. refiner Marathon Petroleum Corp., Indian automaker Tata Motors Ltd. and Chinese Internet company Sina Corp. as being most at risk for stock underperformance due to directors sitting on too many boards. Discovery Inc. and Cadence Design Systems Inc. are among the companies with a CEO on three or more public company boards.
But many companies have gotten the message. For the Russell 1000, only 3% of CEOs (and 8% of all executive directors) now sit on two or more outside boards. This is down from 7% just five years ago (though the change has been driven in part by turnover, according to BI).
Given the growing time commitment involved in corporate directorship, major institutional investors and proxy advisory firms in the U.S. have grown stricter in the number of outside board roles they will allow, Du Boff said. BlackRock Inc. has been one of the most aggressive, tightening its outside board limits to one for CEOs and three for other board members in 2018. Vanguard Group, known for its index-tracking mutual funds, followed suit in 2019.
Only 4% of S&P 500 companies are currently above the threshold for CEOs, while 13% have at least one director in violation of the recommendations for non-executives, Du Boff said.
Overboarding can also vary across regions and countries, driven in large part by local laws or practices, according to BI’s review. South Korea and Japan typically have the lowest potential for excessive director roles, with directors sitting on an average of fewer than 0.5 outside boards, while countries such as India and Hong Kong tend to have significantly higher average numbers of external boards, at over 1.25.
Among European nations, France, Germany and the Netherlands have corporate governance rules that limit the number of additional boards for directors to four and for executives to two. The U.K. has no requirements for non-executive directors, but company managers may only serve on one other FTSE 100 board.
Sustainable Finance in Brief
The Church of England dumped its Exxon Mobil holdings because the fossil fuel giant has failed to meet critical climate goals. HSBC says it aims to reach a net-zero carbon client portfolio by 2050 to align its business activities with the Paris climate agreement. The $3.2 trillion hedge fund industry fails spectacularly when it comes to diversity within its ranks. Goldman Sachs says it is boosting its presence in Latin America with a focus on debt for ESG-friendly uses. Europe is set to become the world leader in green bond issuance and one of the side effects could be a stronger currency.
Bloomberg Green publishes the Good Business newsletter every Wednesday, providing unique insights on climate-conscious investing and the frontiers of sustainability.
For more articles like this, please visit us at bloomberg.com
©2020 Bloomberg L.P.