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The Eversheds Board Report: Measuring the impact of board composition on company performance

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    Our survey said . . .

    Despite improving activity levels we are all still feeling the aftershocks of the financial crisis.  Whilst the past few years have, in anyone’s estimation, been a challenge, there have been a number of “..lessons learned..” - there really was a need for all that downside protection the lawyers insist upon after all, and you can actually have too much of a good thing - being two of them!

    The past two or three years have also been a proving ground for companies and it is important that we learn from the difficult times and use the knowledge gained to make sure that we make the most of the recovery as it strengthens through 2011 and into 2012.  With this knowledge we can shape the composition of the boards of UK businesses to ensure that they prosper and are better placed to weather the impact of future downturns more effectively.

    As one of the largest International law firms, Eversheds has used its extensive international client base and professional contacts across the globe, including a number and variety of sectors and industry bodies, to research one of the possible factors affecting the achievement (or not) of success during the financial crisis, namely, the composition of the board.  As lawyers active in the private equity space, and advisors to some of the largest global companies, we understand the importance of having the right team and the impact the make-up of the senior management can have on the performance of a business.

    In conducting our research we wanted to understand how well prepared boards really were to deal with the challenges that arose during the financial crisis and, in addition, to try and identify what differentiated the more successful companies from the rest.  Our findings make thought provoking reading and we sincerely hope will add to, and aid, the ongoing debate into the board, its role and responsibilities.

    What did we do?

    As part of our research (undertaken on our behalf by an independent research company) we investigated the share price performance of 241 of the worlds largest companies between January 2007 and December 2009.  The sample group was drawn from the largest companies on stock market indices in the UK (FTSE 100 and 250), the US (S&P 100), Continental Europe (EuroStoxx 50), the Far East (Hang Seng) and Australia (S&P/ASX50) across a number of sectors.  The sample included 50 banks.

    Although our research was targeted at listed companies we believe our findings are equally relevant to privately owned (including those that are private equity backed) businesses.

    In addition to looking at share price performance and company success before, during and after the financial crisis, we also investigated the correlation such share price performance had with the composition of the board looking particularly at size, diversity, independence, skills mix, experience and longevity of service.

    Added to our quantitative research we also then interviewed 50 directors selected at random from the companies forming our research sample.  These directors were asked for their opinions on board role, board composition and board effectiveness.  The findings were then analysed both by region and by industry sector.

    This mixture of objective and subjective analysis uncovered some important issues which are of particular interest at this time bearing in mind the recent publication of the Davies Report.

    Our key findings

    The key findings from the Eversheds Board Report can be summarised simply as smaller, independent and diverse boards do better.


    Better performing companies tended to have fewer directors.  This was shown to be particularly true for companies in Hong Kong, the US and Continental Europe.  In the sample group, boards had between 6 and 32 directors with those in Continental Europe having the largest average number of directors at 18.7.  Directors interviewed were largely unsurprised by this finding, noting the benefits of smaller boards (in descending order of mentions) as: greater focus on the key issues; better management from the chair; quicker decision making; and better overall dynamics between board members.


    There was a positive correlation between share price performance and the number of independent directors on company boards.  In this context by ‘independent’ we mean directors who have little or no direct sector specific experience.  Directors interviewed marginally preferred independence to experience when asked to make a choice although a majority (67%) said that both were important when putting a board together.  In particular many executive directors said that they had not experienced such difficult economic conditions before and therefore had placed greater value on the skills and experiences of the non executives.


    Another finding from our research was that a higher proportion of female directors tended to lead to better performance.  This finding was supported by both the statistical and the cluster analysis of quantitative data reviewed.  This was a particularly strong finding for banks and UK companies.

    While the findings showed that companies whose boards had a higher ratio of female directors did perform better, opinion was split about whether diversity for its own sake was beneficial for board performance.  Less than half of directors interviewed (who  positively thought that diversity was a good thing for its own sake) were directly in favour of taking positive action (through the introduction of quotas or similar) to place more women on boards.

    Additional findings

    Other points of interest coming out of the Eversheds Board Report include:-

    • having a serving CEO of another company on your board appears to be an asset;
    • boards whose directors held a number of other directorships had a negative impact on share price performance;
    • better performing companies were significantly more likely to have a higher incidence of shareholders holding a substantial shareholding (3% or more);
    • generally speaking our findings apply across sectors and geographies;
    • whilst greater engagement by the NED’s was encouraged, this did lead to tensions and a blurring of roles;
    • average board room compensation dropped by an average of 22% (£11.44 million to £8.95 million) with the largest decreases occurring (perhaps not surprisingly) in the financial services sector; and
    • companies from Hong Kong and the UK faired best with average share price gains in the UK of 15.6% with companies from Continental Europe fairing the worst with share price drops of 29%.

    Optimal Board Composition

    Whilst it is always dangerous to generalise, our research suggests that, from the sample we reviewed, the ideal board would be made up of 11 directors.  Two of these would be executives (typically MD/CEO and CFO) and nine non-executives; at least two would be female; two non-executives would have industry experience and seven would be independent.  The average age of director would be 57.5 years with 4.6 years service.

    Optimal Board Composition

    Clearly there were regional and industry variations that could change this composition but what was clear was that the best performing boards in Europe were unitary so any two-tier boards were excluded from the sample in order to get median values.

    It should, of course, be noted that our research centred on some of the worlds biggest companies, all of which are listed on a publicly traded exchange.  As such it is difficult to draw direct comparisons, in particular regarding the size of the ideal board, with smaller, non listed, businesses.  Having said that, we are of the view that the general finding that smaller, independent and more diverse boards tend to operate more effectively is equally applicable to all companies in all sectors and geographies.

    ….and finally

    Over half of the directors interviewed (60%) thought that the substantive role of the director has not fundamentally changed as a result of the financial crisis.  The current focus is now on how that role is performed.  Every director agreed that the role of the non-executive director (and by analogy investor director) has become more intense.  Today the top two expectations of the NED’s are to spend more time looking at the company’s financials; and gaining a thorough understanding of the company’s business.

    The directors identified the following challenges facing company boards (in descending order of mentions) as being the things that keep them awake at night:-

    the economic climate; the need for the executives, not the board, to manage (day to day) the company; too much regulation interfering with the board’s activity; focussing on long term strategy and resisting short term market pressures; appointing the right management and board team; proving their own value/contribution to the company; succession planning; striking the right balance with the regulators; learning the lessons from the financial crisis; and international expansion and emerging markets.

    Out of the other challenges mentioned by directors, incentivising management was seen as more important than managing risk.

    For more information or advice, please contact:

    Mark Spinner
    Private Equity Partner
    Tel: 0845 497 4759

    For a free copy of the Eversheds Board Report summary please email us at

    To see video interviews with some of the directors who contributed to the research please go to and click on ‘The Board Report’.


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