LONDON, March 7, 2011 /PRNewswire/ --
- Major new international study into boardroom culture investigates relationship between board composition, share price performance and company success before, during and after financial crisis
- Key factors for success include smaller boards, increased diversity and greater board independence
- European companies saw greatest average decrease of 29% in share price during the financial crisis
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.
The Eversheds Board Report is a forward thinking study which analysed the performance of nearly 250 of the top companies in Europe, the US, and Asia Pacific* 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 mainland Europe - some global trends in boardroom success emerged.
Better performing companies had fewer directors in total on their boards. While this was particularly true for Hong Kong and the US, European companies, excluding the UK, appeared to suffer from having the highest number of directors, averaging 19 directors in 2009. This is in comparison with 12 directors in the US and 14 in Hong Kong, both of which were more in line with the global optimum size of 11. Many of those surveyed believed having a smaller board 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 those companies who had more female directors performed better during the financial crisis - this was particularly so in the UK and in the banking sector. Although the proportion of women on European companies' boards increased from 6.9 % in 2007 to 9.1% in 2009, the ratio was still amongst the lowest across all the regions identified in the report.
While the report showed that the more successful companies had more female directors on their boards, 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.
There is also a strong correlation between share price performance and the number of independent directors on company boards, yet in mainland Europe the ratio of independent directors remained low, with just 52% in 2009 compared with 87% in the US. When interviewed, directors narrowly preferred independence to experience, however 67% believed both were equally important.
Substantial shareholdings - companies with higher percentages of share capital held by shareholders who hold 3% or more of the issued share capital - also proved a factor for success. In mainland Europe however, the ratio of shares held by substantial shareholders was low, at just 25% in 2009, having risen slightly from 23% in 2007. Companies that performed better during the financial crisis were significantly more likely to have a higher number of shareholders with a substantial shareholding.
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."
Mark Spinner, corporate partner at Eversheds, adds:
"The major trends that emerged from our research certainly generate debate, particularly when considering the relative success of the more independent, diverse boards and the extent to which mainland European companies have suffered in terms of their financial performance during the crisis as a result of their board's not reflecting the optimum criteria. Furthermore, many directors reported that there was a 'power shift', with executive directors relying on the experience of non-executive directors more than previously. However, the general consensus seems to be that this would not be a permanent change - many directors believe now is the time for non-executive directors to 'pull back' and allow the executive management team to manage.
"Lessons should be learned from the factors that contributed to company performance and it is clear that, where appropriate, more streamlined, independent boards with a higher ratio of female directors could be keys to future success."
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.
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.
Chantel Gohil For Eversheds LLP Tel: +44(0)207-919-4500 E-mail: firstname.lastname@example.org
SOURCE Eversheds LLP