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RiskMetrics Group

RiskMetrics Group. Assessing director performance. 30 March 2009. The view from the board.

stephanie-rokos
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RiskMetrics Group

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  1. RiskMetrics Group Assessing director performance 30 March 2009

  2. The view from the board "In considering John Smith’s potential appointment to the Acme Board, Directors were aware of the issues facing Failed Co.  The Nominations Committee met and discussed John Smith’s suitability at length, as did other Directors.  Directors satisfied themselves that John was an appropriate candidate and that has proven to be the case since he joined the Board.“ Source: Company response to RiskMetrics, 2008 Any questions? Is this a good enough answer for shareholders to rely on?

  3. Assessing performance: The story so far • Accountability: Allco incumbents reelected with 92.4 percent at the 2008 AGM; average against at top 100 94.1 percent in 2008 • Board selection: Absent owners, more then half of appointments from within existing S&P/ASX 100 pool since 2005 • Imperfect information: Collective decision making, individual elections • The problem of resignation: Information asymmetry

  4. Assessing director performance: Why bother • Problematic: Boards are collective but elected individually • Director behaviour and participation not visible to shareholders • Shareholders – especially those with fiduciary duties – are obligated to try and assess the performance of their representatives on company boards • Electing – and removing - directors is shareholders’ core right and major protection

  5. Getting scientific • Looked at performance of directors on boards of S&P/ASX 100 companies continuously listed between 1 September 2000 and their 2007 financial year end • Universe of 49 companies, 649 board seats • Attributed portion of company TSR – relative to main GICS sector performance – to each director • Weighted by director’s proportion of remuneration paid to all NEDs during time on board

  6. Getting scientific • Performance from date of appointment • Dividends not reinvested • Executive directors excluded • Total score across multiple boards is simple average • 106 individuals had multiple board seats during survey period

  7. The results: Multiple board seats • Median value add: 3.22 percent • Top quartile: Starts at 10.59 percent • Bottom quartile: Starts at -0.3 percent • 37 ‘multiples’ with positive ‘alpha’ across all boards • 10 ‘multiples’ with negative ‘alpha’ across all boards

  8. The top 10

  9. The dream board: As selected by the AFR, 2008

  10. A point in time • Director performance is a bit like the French Revolution • As an example: • - Rio directors as at 31 December 2007 look great • - Peter Willcox at AMP: Adjusted TSR is heavily negative • So, looking at TSR at a point in time by itself is not the answer • But how else can shareholders empirically assess performance?

  11. Where next • Let’s start the conversation about director performance • Open to suggestions of a better method of assessment • Our commitment: An update of the numbers for 2008 shortly

  12. Q&A • Martin Lawrence • martin.lawrence@riskmetrics.com

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