HONG KONG, March 7, 2011 /PRNewswire-Asia/ --
- Major New International Study into Boardroom Culture
Investigates Relationship Between Board Composition, Share Price
Performance and Company Success Before, During and After the Financial
Crisis
- Key Factors for Success Include Smaller Boards, Increased Diversity and
Greater Board Independence
- Hong Kong Highlighted as the Best Performing Market With an
Average 15.6% Rise in Share Price During the Financial Crisis, but With
Board Composition Deviating From the 'Ideal', to What Extent is This
Position Sustainable?
Smaller boards, more female directors and a higher proportion of independent directors are the key boardroom components for company success, according to a major new report released today (7 March) by international law firm Eversheds. Yet as Hong Kong emerges as the best performing market despite boards not meeting all of the key success criteria, some interesting questions are raised about how companies can maintain their position as they emerge from crisis.
The Eversheds Board Report is a forward thinking study which analysed the performance of nearly 250 of the top companies in Asia Pacific,* Europe and the US between October 2007 and December 2009 to discover whether board composition had any direct relationship to the company's ability to weather the financial crisis.
While there were some regional differences - the best performing companies were found in Hong Kong where there was an average of a 15.6% rise in share price compared to an average decrease of 29% in Europe - some global trends in boardroom success emerged.
Better performing companies had fewer directors in total on their boards. The report shows that the optimum size for a successful board was considered to be 11 directors. Although the average in Hong Kong emerged as being slightly higher at 14, this was still lower than the European average of 19. Many of those surveyed believed that smaller boards resulted in a greater focus on the issues, better management from the chair, quicker decision making and better overall dynamics between the board members.
The report also reveals that companies with more female directors performed better during the financial crisis, particularly in the banking sector. However when interviewed, only 55% of directors thought that diversity for its own sake was beneficial for board and company performance and only half that number was directly in favour of taking positive action to appoint more women onto boards. In Hong Kong in particular, the proportion of female directors sitting on the Board was the lowest amongst all the regions surveyed, at just 6% in 2007 and 8% in 2009.
The report also shows a strong correlation between share price performance and the number of independent directors on company boards. When interviewed, directors narrowly preferred independence to experience, however 67% believed both were equally important. Yet in Hong Kong, boards had the lowest proportion of independent directors compared with other regions, with just 38% of independent directors in 2009, in contrast to a massive 87% in the US. Interestingly however, Hong Kong also had the highest percentage of independent directors with relevant industry experience, at 24.8%.
Nick Seddon, Managing Director of Hong Kong at Eversheds, comments:
"The major trends that emerged from our research are
interesting, particularly the relative success of the more independent,
diverse boards. However it's interesting to see the strong performance of
companies in Hong Kong, particularly when we take into account the extent
to which board composition appears to go against the optimal findings.
The development of Hong Kong as a financial centre is still a little
behind that of London and New York and this poses a number of important
questions around the way in which companies in Hong Kong might need to
adapt in order to hold their current position in the global market."
The report also reveals that substantial shareholdings - companies with higher percentages of share capital held by shareholders who hold 3% or more of the issued share capital - are an additional factor for success. Companies that performed better during the financial crisis were significantly more likely to have a higher number of shareholders with a substantial shareholding. This was particularly true for Hong Kong, where an average of 58% of shares are held by substantial shareholders. This is nearly six times more than the UK, which at just 10% has the lowest number of shares held by substantial shareholders.
John Heaps, chairman at Eversheds, comments:
"Boardrooms across the world have faced extraordinary challenges over the
past few years. We undertook this major international study to understand
and respond to the challenges our clients are facing. We also wanted to
find out if trends could be identified that directly related board
composition to company performance during the financial crisis. The
financial crisis has forced many companies to think hard about the
structure of their boards."
Nick Seddon concludes:
"Clearly lessons should be learned from the factors that contributed to
company performance and it seems that, where appropriate, more
streamlined, independent boards with a higher ratio of female directors
could be the key to future success."
*Research sample:
As part of this study, the performance of 241 companies was examined from October 2007 and December 2009. The sample included:
- UK: 75 companies from the FTSE 350 including the top 50 companies in
the FTSE 100 by market capitalisation and 25 companies from the
FTSE 250
- USA: Top 51 by market capitalisation from the S&P100 in the USA
- Continental Europe: Top 50 companies by market capitalisation from the
EuroStoxx50
- Asia-Pacific: 50 companies - 25 from the Hang Seng Index in
Hong Kong and 25 companies from the S&P/ASX50 in Australia
- The 241 companies included 50 banks
Between August 2010 and October 2010, 50 directors selected at random from the 241 companies were also interviewed thus allowing both a quantitative as well as a qualitative analysis of the results.
Chantel Gohil
For Eversheds LLP
Tel: + 44(0)207-919-4500
E-mail: chantelgohil@eversheds.com
Notes to editors
About Eversheds LLP
Eversheds LLP and its world wide associate offices have over 4,500 legal and business advisers providing services to the private and public sector business and finance community. Access to all these services is provided through 46 international offices in 28 jurisdictions. Eversheds combines local market knowledge and access with the specialisms, resources and international capability of one of the world's largest law firms.