A possible link between board composition and share price performance has
emerged in research recently published by the ABI’s Institutional Voting
Information Service (IVIS).
The study focused on 14 companies that were awarded two or more ‘red-tops’
for breaches of the Combined Code over a period of three years (2004-2006).
Red tops for Combined Code issues are rare. They are given, for example,
where an executive director is a member of the remuneration or audit committees,
or where the company has no independent non-executive directors at all.
Therefore, the receipt of more than one red top over the period indicates a
genuine, long-term problem with the make-up of the board.
Of these 14 companies, nine had no independent non-executive directors and
three had only one. One of the companies had three independent directors and the
last company had moved from having no independent directors in 2005 to having
five in 2006.
Although most of the companies are outside the FTSE 350, and therefore not
subject to the code requirement that half the board be made up of independent
directors, 12 of the sample did not even have at least two independent
The criteria for non-independence includes those individuals not considered
independent by the company, and those not meeting the Higgs criteria of
independence. The extent of the imbalance can be seen in the aggregate figure
for directors on the 14 boards. The total was 43 executives, 30 non-independent
non-executives and just seven independent non-executives.
The result of this imbalance between independent and non-independent
executives can be seen in share price performance relative to the FTSE All-Share
and to the companies’ sector peers. Eleven of the 14 companies underperformed
their sector in share price performance, with four underperforming by more than
50%. Against the FTSE All-Share, nine underperformed by more than 50% with the
highest level of underperformance at 70%.
While the study does not claim to offer a causal relationship, it does appear
that a poorly balanced board can be an important factor in underperformance. In
this case, Higgs’ code compliance can be seen not as adding cost, but adding
James Upton is a corporate governance analyst at the
Association of British Insurers
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