Board of directors

Female directors:  There has been research which shows that having a gender-diverse board improves the monitoring function.  Adams & Ferreira (2009) find boards that are more gender-diverse attend more meetings and allocate more effort to monitoring roles.  CEO turnover has a better link to firm performance and more CEO pay is linked to equity-based performance incentives (rather than base pay).

  • Fulfillment criteria: Higher score awarded the greater the percentage of female directors
  • Why this fulfillment criteria: As per literature
  • Scoring: 0=0-15%, 1=16%-30%, 2=30%+

Average tenure of boards: A board is supposed to be independent from management so there can be proper oversight and the views of shareholders represented.  When directors are part of a board for extended periods of time they can become too ‘friendly’ with management.  This can affect the ways in which boards make decisions, perhaps to the detriment of shareholders.  This can apply to independent and non-independent directors.  Vafeas (2003) finds that independent directors with long tenure are likely to be part of the nomination and compensation committees and therefore able to decide on such items as CEO pay.  Vafeas (2003) indeed finds that these directors are associated with allocating higher CEO pay packets.

  • Fulfillment criteria: Over 9 years
  • Why this fulfillment criteria:  75th percentile of S&P 500 or 3 full director terms under NZX listing requirements
  • Scoring: 0=no, 1=yes

Frequency of board meetings: Lipton & Lorsch (1992) propose that a problem directors have is a lack of time to ensure they can monitor management effectively and perform their duties.  More board meetings benefit shareholders as directors can properly discuss and manage any issues that the company faces.  On the other hand, if directors do not use their time effectively, too many board meetings are an inefficient use of time and can hurt shareholder wealth. Vafeas (1999) finds that the number of board meetings actually has a negative relationship on firm value.  The two opposing views suggests that there is a level of board meetings that is optimal – not too many but not too few.  This maximises the monitoring role of the board.

  • Fulfillment criteria: 8-12
  • Why this fulfillment criteria:  As per literature
  • Scoring: 0=no, 1=yes

Attendance at board meetings: Following on from the points made in the frequency of board meetings, if directors do not attend board meetings how can they effectively carry out their duties to the shareholders?  Brown & Caylor (2006) look at the percentage of board meetings attended by directors and the effect on firm value. They find that a higher percentage of meetings attended is associated with higher value firms.  Therefore, through board meetings, the board maintains effective monitoring of management.

  • Fulfillment criteria: Average attendance over 90%
  • Why this fulfillment criteria:  As per literature
  • Scoring: 0=no, 1=yes

Attendance at committee meetings: As well as attending board meetings directors should attend committee meetings, if not more so.  Committees allow a focused discussion of important company matters such as remuneration or auditing.  These matters can directly affect shareholder value.  Berghe & Levrau (2004) review previous academic and industry study on good corporate governance and find that nearly all studies include committee attendance as a variable to measure. This suggests attendance at committee meetings is an important facet of the monitoring role of the board.

  • Fulfillment criteria: Average attendance over 90%
  • Why this fulfillment criteria:  As per literature
  • Scoring: 0=no, 1=yes

Audit committee has at least one qualified accountant: For the board to effectively monitor management they must have the necessary skills.  By having a qualified accountant on the audit committee, when compared to having a non-accounting expert, the monitoring role of the board is enhanced (Qin, 2007). By being a qualified accountant investors can be confident there are the necessary skills to monitor managements actions through the financial statements and accounting policies adopted.

  • Fulfillment criteria: One or more qualified accountant
  • Why this fulfillment criteria:  As per literature
  • Scoring: 0=no, 1=yes

Maximum score for the Board category is 7.

References

Adams, R., & Ferreira, D. (2009). Women in the boardroom and their impact on governance and performance. Journal of Financial Economics, 94(2), 291-309.

Berghe, L., & Levrau, A. (2004). Evaluating boards of directors: What constitutes a good corporate board? Corporate Governance An International Review, 12(4), 461-478.

Brown, L., & Caylor, M. (2006). Corporate governance and firm valuation. Journal of Accounting and Public Policy, 25(4), 409-434.

Lipton, M., & Lorsch, J. (1992). A modest proposal for improved corporate governance. Business Lawyer, 48, 59-77.

Qin, B. (2007). The influence of Audit committee financial expertise on earnings quality: US evidence. ICFAI Journal of Audit Practice, 4(3), 8-28.

Vafeas, N. (1999). Board meeting frequency and firm performance. Journal of Financial Economics, 53, 113-142.

Vafeas, N. (2003). Length of board tenure and outside director independence. Journal of Business Finance & Accounting, 30(7 & 8), 1043-1064.