The importance of what happens behind closed doors.
When smart investors look for companies to add to their portfolio, corporate governance, including how effectively the boardroom operates, is a key consideration.
It’s difficult to underestimate the importance of corporate governance in the marketplace.
It is important to choose board members wisely in a way that embraces both diversity and the need for robust discussion. There is no simple formula for the particular alchemy that produces smooth-flowing, intuitive boardrooms, but one strategy may involve the prioritisation of quality over quantity when it comes to membership.
The cliché that ‘too many chefs spoil the broth’ rings true in most areas of life. The structure and processes of corporate boardrooms are no exception.
A diversity of opinions, perspectives, experience levels and agendas can enrich operations and birth new ideas. But too many voices can generate chaotic or unclear resolutions. Taken further, an unstructured or unfocussed boardroom can instigate a culture of unproductive delays.
According a report from Morgan Stanley Researchi, equilibrium might hold the key.
“The size of the board needs to be balanced against the need for in-depth debate of varying opinions, with a cap to ensure the board is not so large as to be unwieldy,” the report states. “The ideal size of the board may therefore need to take into account the scope and nature of the operations of the company.”
The Morgan Stanley report also points to factors like gender diversity as being proxies for diversity of thought throughout organisations, and identifies links between high gender diversity levels and better risk adjusted stock returns, lower volatility and higher ROE.
According to a 2016 report by Deloitte, 43% of new ASX 200 board appointments were women, representing a 13% increase from April 2015ii.
Another important ingredient in the composition of a workable and successful boardroom membership is appropriate expertise. To get the best outcomes, it is essential to appoint skilled and experienced board members who can bring insight and knowledge to complex processes and decisions. The board’s management team should also share the same long term objectives for the company; which are similarly aligned with the interests of various stakeholders, including minority shareholders.
Board independence is also a point worthy of significant consideration, as a large body of research attests to the benefits of independent directors on company performance, CEO pay, M&A decisions and corporate fraud.
These are just some of the factors that come into play when considering whether or not to invest your hard-earned funds with a particular company. For more detailed investment advice please contact your Morgan Stanley Financial Adviser.
i ‘Embedding Sustainability into Valuation: The Next Chapter.’ Jessica Alsford; Victoria Irving; Faty Dembele. Morgan Stanley Research. January 2018.
ii ‘Women in the boardroom: A global perspective – 5th edition.’ Deloitte. 2016.