Non-execs earn their keep

A study has found that non-executives have far more importance than their
perceived ‘decorations on the Christmas tree’ – as once described by the late
Tiny Rowland of Lonrho.

The study, from the Association of British Insurers, found that share prices
of companies that repeatedly committed serious breaches of the City’s Combined
Code of corporate governance underperformed their sector, particularly when
their boards were populated only by executive rather than non-executive

ABI head of investment affairs,
, said the study showed a strong link between governance standards
and share price performance.

‘It shows that persistent imbalance in board composition tends to go
hand-in-hand with a reduced ability to create value,’ said Montagnon.

In the last three years (2004-2006), 14 FTSE All Share companies have
received two or more red-tops related to serious breaches of the Combined Code.

Comparative performance across their FTSE sector over the three year period
show that 11 out of these 14 companies under-performed their sector in share
price performance. Four underperformed by more than 50 per cent. The worst
performer lagged its peers by 62%.

Comparative performance across the FTSE All Share index over the three year
period shows that nine out of these 14 companies under-performed the FTSE All
Share. Four underperformed by more than 50%. The highest level of
under-performance was 70%.

Board composition of companies incurring two or more red tops

The overall balance between executives, independent, and non-independent
non-executive directors is important. The Combined Code recommends that for FTSE
350 companies, half of the Board (excluding the Chairman) should comprise
independent non-executives. Outside the FTSE 350, companies are expected to have
at least two independent Non-Executive Directors.

The fourteen companies receiving two or more red tops showed a preponderance
of executives on the board. Most of them are smaller companies outside the
FTSE350 and therefore not subject to the Code requirement that half the board be
made up of independent directors. However, of these fourteen companies:

12 companies did not meet the requirement for smaller companies that they
should have at least two independent directors.

Nine had no independent non-executive directors and three had only one.

Related reading