Have you ever wondered how the same company directors manage to pop up at conferences and seminars, as independent appointees to important government committees or investigations, and as chairman of more than one major company? In our board effectiveness and remuneration work, as we observe company directors cope with the heavy load of board papers and governance processes, we are often asked “how can these extremely busy company directors cope with multiple boards, charitable and pro bono commitments, and still be effective?” Yet, more often than not, they are. And the reasons they are could be their highly networked and busy lives – their very “connectedness”.

Recent research described later in this article provides solid support for individual director “connectedness” and board effectiveness.

Some boards may already seek out elements of connectedness in prospective new directors, by specifying that directors have, for example, current and extensive relationships with prospective customers, or suppliers, or regulators, or politicians. But very few, in our experience, go further for a more rigorous and valid assessment of “connectedness”. And fewer still use the concept in their annual reviews of their own board’s effectiveness. Yet this is not difficult. In customising board assessment questionnaires, we can test the extent of perceived or observed connectedness. This can be supplemented, or indeed replaced, by a less intrusive but more robust statistical analysis that Guerdon Associates can undertake of a board’s and its individual directors’ connectedness from a vast array of data combed from public disclosures for over a decade.

The data and research lends support, to an extent, as to why the current emphasis on diversity should not be seen as just a “liberal” trend, but a real contribution to improving board effectiveness through more extensive whole of board connectedness and, as the research shows, risk adjusted returns over time.

And given its importance in board effectiveness, it may serve a board well to focus on just this one aspect during one of the board’s annual review cycles, as it has implications for board renewal programs and director development.

The study by Vincent Intintoli (Clemson University), Kathleen Kahle (University of Arizona) and Wanli Zhao (Southern Illinois University), “Board Connectedness and Board Effectiveness” built and extended on extensive prior research. Importantly, their study of “connectedness” controlled for the extent that directors had an established relationship with management by looking at directors appointed before the CEO.

The researchers examined the effect of the social connectedness of independent directors on their ability to monitor and advise the company. The researchers begin by providing evidence that well-connected directors have greater protection from career concerns. The researchers next examine the channels by which director connectedness may improve monitoring and find that audit committee connectedness has a positive effect on the quality of financial reporting and a negative effect on the probability of fraud. Further, better connected remuneration committees are less likely to overpay the CEO and more likely to initiate performance-based CEO dismissals. Finally, the researchers examine the effect of well-connected directors on the company’s information environment. The researchers show that companies with highly connected boards have lower financing costs and higher payout ratios, consistent with better connected boards mitigating free cash flow problems. Overall, well-connected boards appear to be effective in promoting shareholders’ interests.

See the research HERE.

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