When it comes to boards, it seems size matters

Michael Bennet
SEPTEMBER 09, 2014
THE AUSTRALIAN


Board composition Source: TheAustralian
SOME of the nation’s largest companies, including BHP Bill­iton, Wesfarmers and Westfield, are employing too many directors, potentially weighing on investors’ returns as “free riding” and “group think” drives underperformance, new research has found.
Amid heightened uncertainty about the stockmarket following muted profit results last month, Credit Suisse’s environmental, social and governance analysts — who screen for left-field headwinds — revealed many companies did not have an “optimal” number of directors on their boards.
It found large companies with a market value of more than $5 billion with nine to 11 directors was ideal, outperforming companies with more or less. For smaller companies worth below $5bn, an optimal board size was deemed to be six to eight members, due to their “lower firm complexity”.
Credit Suisse ESG analyst Sandra McCullagh said the analysis, based on performance between 2008 to 2013, showed too many cooks can “spoil the broth”. “Our results suggest that large boards may be less effective in carrying out their duties than moderate-sized boards for companies large and small,” she said.
“We infer that larger boards may inhibit or delay critical ­decision-making, may be more subject to ‘group think’ and free riding from its members, resulting in ­underperformance.”
The report backs a study by governance researchers GMI Ratings for The Wall Street Journal that found companies worth more than $10bn with smaller boards produced better shareholder ­returns between 2011 and 2014.
Of large companies, Credit ­Suisse found BHP Billiton, Crown, Wesfarmers, Rio Tinto, Westfield, Fortescue Metals Group and Goodman Group all had 12 or more directors, more than the optimal number. Large caps with too few include QBE Insurance, Insurance Australia Group, Amcor, AGL Energy, Mirvac, Sonic Healthcare and Incitec Pivot.
At the smaller end, Bendigo and Adelaide Bank, Harvey Norman, BlueScope Steel, Primary Health Care and Fairfax Media were among those with too many directors. Flight Centre, Seek, Charter Hall Retail REIT, Independence Group and Panoramic Resources have less than the optimal number.
Australian Shareholders Association outgoing policy and engagement co-ordinator Stephen Mayne agreed boards should not have more than 11 directors. An odd number was best, and independent directors needed to have more “skin in the game”. “We agree that too big is too cumbersome, too inflexible and too slow moving,” he said.
John Colvin, chief of the ­Australian Institute of Company Directors, said there was a “danger” in applying the optimal board sizes identified by Credit Suisse “too strictly”, saying it ­ignored other factors beyond market capitalisation. He said BHP’s board size would probably reflect its large market capitalisation, the geographical spread of its operations, the complexity of its operations and its dual-listing in Australia and London.