April 25, 2013
Diversity is key to an effective board finds global study
As we’ve previously reflected, progress has been slow in promoting more women to executive levels, and there are increasing concerns on a lack of diversity within the built environment. Now new evidence has emerged which helps prove just why boardroom diversity is such a pressing issue. According to a major report released by law firm Eversheds there is a global trend towards smaller boards, which means that although companies with smaller boards tend to deliver better share price performance, chairmen and nomination committees have to balance size with a number of other important factors shown to demonstrate better share price performance, such as appointing more executives to boards and encouraging greater diversity in the broadest sense.
The ‘Eversheds Board Report: The Effective Board’ highlights global trends in board composition over the past five years, and found that boards are now 8 per cent smaller on average when compared to five years ago, with the greatest change taking place over the last three years, down 7 per cent from 2009 to 2012. Nearly all board directors (93 per cent) interviewed for the report believe that an effective board should have less than 12 members.
The study found that diversity is key to successful boards; with a significant majority of board directors (61 per cent) believing that diversity in the widest sense has an important impact on board performance. This includes diversity of skill sets, expertise outside of sector, international experience, age and background as well as gender. This focus on diversity, when combined with shrinking board size, means that decisions on board composition are becoming an increasing challenge for chairmen and nomination committees.
The study also identified that companies with a higher number of executive directors on their boards tended to have a better share price performance, as did companies having more directors on the board with experience of a different industry sector.
John Heaps, chairman at Eversheds, comments: “It is encouraging that our research reveals that diversity is still a key priority, with directors now moving the debate beyond gender to also encompass diversity of age, sector and skill sets as well as international experience. However, the trend towards smaller boards means that achieving this diversity is becoming an increasing challenge.”
The issue of gender diversity in the boardroom was also investigated in the global study, and the findings highlight that in the last five years, there has been a 50 per cent increase in the percentage of female directors on boards across all regions. That said, this increase is against the context of a low base and the appointments of women are mostly of a non-executive, rather than executive, nature. The largest increases were in Europe (156 per cent) and in Hong Kong (133 per cent).
The ‘Eversheds Board Report: The Effective Board’ is a global study that analysed the share price performance of over 500 top companies in Europe, the US, Asia-Pacific, the Middle East and Brazil between 2011 and 2012 to investigate the characteristics of global boardrooms. The report also reflects in-depth interviews with 85 senior board members from around the world. It follows the first Eversheds Board Report published in 2011, the first study to compare board composition and share price performance with research going back to 2007.
To request a copy of ‘Eversheds Board Report: The Effective Board’, visit: https://bit.ly/YZtn6n.
By Sara Bean