Board tenure unrelated to performance on ASX 300, study finds

A recent report from Ownership Matters (OM) shows board turnover on ASX 300 companies is largely uncorrelated with performance, but there have been encouraging developments for appointments from outside the boys' club.

The study reviewing the past 15 years of data found boards from the worst performing companies refreshed themselves more than the best, but only marginally so.

Ownership Matters also identified a strong bias towards appointing directors from within the existing ASX 300 pool, with 38.2 per cent of vacancies filled by directors with existing board seats.

The ASX 300 is more open to outsiders now than before though, with 36 per cent sourced from within compared to 43.4 per cent in 2006. Two years ago the proportion was as low as 31.8 per cent.

The percentage of women on ASX 300 boards has also risen by almost four percentage points over the timeframe to 33.1 per cent.

Women already serving on boards are also more likely to take on an additional appointment than men, at 40 per cent of the cohort versus 17.5 per cent.

In terms of non-executive directors (NEDs) there were negligible increases for women until 2011, when the total proportion of women started to rise and has increased by an average 2.1% per year over the last five years.

"The appointment of women since 2010 has steadily impacted on the length of time directors stay at a company (tenure distribution of NED seats)," Ownership Matters reported.

"For the ASX 300, the distribution of NED seats with up to 10 years' service is now broadly similar within each gender cohort."

The study measured performance based on share price movement and dividends. This wasn't influenced by gender, but performance was adversely impacted when boards were too male-heavy.

"However, the study observed that the performance of companies with boards comprised of more than 90% men was generally worse than more gender diverse boards since 2011 (the period when number of women NEDs began to steadily increase).

"The diminishing number of boards with this attribute makes it difficult to reliably estimate the effect going forward."

The Ownership Matters study noted companies in the bottom decile of returns over the period would turn over an average of 19 per cent of their boards in the following year, while all other companies recorded average yearly board turnover rates of approximately 12.6 per cent.

"This observation was consistent with the analysis of an individual director's probability of retirement.

"In any one year an individual director serving on a company that recorded total shareholder return in the bottom decile of the ASX 300 in any year between 2005-20 had a 21 per cent chance of retiring the following year (17 per cent for chairpersons)."

Given high-performing boards of listed companies are stewards of $1.7 trillion of capital and are an important driver of the long-term health of the Australian economy, Ownership Matters hopes its paper will promote health debate and reflection about the optimal composition of the non-executive director pool.

"There was little meaningful difference in the board turnover rates between companies that outperform compared to those that underperform. Chairpersons stay longer in the ASX 300 pool and have a lower probability of retirement in any year, regardless of performance," the authors said.

"The absence of credible alternative candidates may contribute to high endorsement rates, even in underperforming companies.

"Similarly poor incumbent candidates may be shielded by the Australian convention whereby only one-third of directors on a board are required to face election in a calendar year."

This last point is in contrast to jurisdictions like the UK that insist on the annual elections of all directors in public companies. It is also clear from the data that experience counts, with one in three appointments coming from existing ASX 300 directors.

OM also noted shareholders may be reluctant to act against incumbent non-executive directors regardless of continued underperformance in the companies they serve.

"Our analysis presents evidence that NED tenure is lengthy and that board turnover in the last 15 years is largely independent of company performance.

"If a high performance culture does not exist in the board, investors should ask how one can prosper within the company's workforce?"

OM analysed the pool of 1777 executives and 4143 non-executives who have served on ASX 300 company boards since 2015.

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