Board structure and workload information for ASX300 companies was analysed over the two most recent disclosure years. Our analysis confirms that:
- Boards and board committees are meeting more often
- Boards are getting bigger
- Demand for independent directors is increasing
- The best performing companies have NEDs who meet more often
Assuming these trends continue:
- Supply will decrease because NEDs will eventually have to reduce the number of boards they serve
- Demand for independent NEDs will increase in accord with good governance
So what are boards doing now? Freezing NED fees. Obviously the trends identified in this analysis with recent action in regard to NED fees cannot continue. Something will have to give. And given that regulatory requirements are increasing, it is not workload that will reduce, even if the economic conditions improve.
Further details of our analysis are below.
Changes in board structure and director workload from 2007 to 2008
Boards are becoming larger, more independent and meeting more often. The boards that have increased their workloads the most have also increased company performance the most. The trend data from 2007 to 2008 supports the argument that the workload of non-executive directors in well performing companies continues to increase. This provides evidence to support increasing board fees, even in a recession.
Board structure and workload information for ASX300 companies was analysed from their 2007 and 2008 disclosures. There were 257 companies in the sample group. Companies not in the ASX300 for the two year period were excluded.
Current board structure
The following graph shows the average board structure, based on 2008 disclosures.
The graph indicates that, overall, the majority of board members were independent NEDs. 77% of companies had at least half of the board made up of independent NEDs. The remaining 23% had less than half of directors identified as independent.
The workload for individual directors is not disclosed. However we can estimate the time commitment based on the number of board meetings held. Therefore we can calculate a proxy for board non executive workload by multiplying the number of meetings by the number of non executive directors.
The number of committees and how often they met was also analysed. We will include analysis on a committee-by-committee basis at a later date.
Changes to board structure from 2007 to 2008
Figure 2 indicates that boards are getting larger and more independent. To calculate a proxy for board workload, we multiplied the number of NEDs by the number of board meetings (excluding committee meetings) for both years and compared them. This has increased by more than 5% from 2007 to 2008. The number of board committees and committee meetings has also increased, which would further increase workload.
The median increase in NED fees was around 7% for the same period, which is in accord with increased workload.
Variation by company size
The structure and size of the board varies with company size. Not surprisingly, larger companies have larger boards. However, the largest companies and the smallest companies had the largest proportion of independent directors as the following graph shows.
Company size was determined using market capitalisation and the sample was split into quartiles according to the following table.
The medium sized companies have the smallest proportion of companies complying with the governance guidelines relating to director independence.
As anticipated, workload increased most dramatically for the smallest companies. These are the companies most likely to experience significant growth.
The very large companies were the only group to reduce their workload. This group on average reduced the number of meetings, directors, committees and committee meetings.
Interestingly, the median increase in directors’ fees was highest for the largest companies and lowest for the smallest companies.
Variation by industry
The structure of boards varies across industries. We analysed the five largest industry groups and the following graph shows the board structure by industry.
The finance sector boards have the largest proportion of independent directors. The industry groupings are summarised in the following table.
The following graph shows the changes in board structure from 2007 to 2008 for companies grouped together based on industry.
The consumer sector is the only industry to reduce workload, by reducing the number of NEDs. The finance sector was the only one to significantly increase the number of board and committee meetings.
The energy and materials industries have both increased workload by increasing the size of the board. These were the only two sectors to have positive 3 year returns to December 2008.
The materials sector increased board size by significantly increasing the number of NEDs at the expense of EDs, whereas the energy sector increased both.
Relationship with performance
Performance was assessed using three year Total Shareholder Return (TSR). Note that similar results were obtained when we used a relative, industry based TSR. The companies were sorted into quartiles and the following table summarises the company groupings. The graph that follows shows the current board structure of companies in the various performance groupings.
The data does not support the belief that having a majority of independent directors on the board will produce better long term performance. The following graph shows the average board structure by performance grouping.
There are only small variations in board structure based on performance. When we grouped companies based on relative TSR, even these small differences disappeared.
The following graph shows the changes in board structure from 2007 to 2008 for companies grouped together based on performance.
It appears that only the poor performing companies have bucked the trend to increase the workload. This group on average actually reduced the number of meetings, NEDs and committees, although the number of committee meetings did increase. They were also more likely to increase the number of executive directors.
The data suggests that boards that have increased their workload have also increased their performance. The implication that directors of poor performing companies have decreased their workload is counterintuitive, since we might have expected them to meet more often when performance declines.
With workload increasing for most NEDs it is likely that they will be able to service fewer boards. This will have a compounding effect as demand increases for skilled NEDs. Attracting experienced and competent NEDs is likely to become more difficult if these trends continue.© Guerdon Associates 2021 Back to all articles