Australia's biggest companies are being run by a 'directors' club', study finds
A major new study of who runs Australia’s biggest companies has confirmed the existence of a “directors’ club” and proves boards are not punished for poor performance, investors say.
More than a third of vacancies on the boards of the top 300 listed companies in Australia are filled by directors of other companies in the same group, according to data compiled by proxy advice firm Ownership Matters.
The study, which compiled information on every director of an ASX300 company since 2005, also found that the directors of poorly performing groups last almost as long as the directors of top companies.
It comes as corporate Australia readies for an annual shareholder meeting season that got off to a torrid start last week when Crown Resorts directors survived a protest vote only due to the intervention of the company’s biggest shareholder, the billionaire James Packer.
To combat the lack of consequences faced by directors, they should be forced to run for re-election every year, as happens in the UK, the Ownership Matters co-founder Dean Paatsch said. Currently, most Australian directors only face a shareholder vote once every three years.
Non-executive directors are supposed to perform a key role in making capitalism work, by supervising the efforts of company management to grow businesses.
Directors of companies in the ASX300 oversee $1.7tn in capital at a cost of around $400m in fees.
Ownership Matters analysed the pool of 1,777 executives and 4,143 nonexecutive directors who have sat on ASX300 boards since 2005.
Over that period, 38.5% of director positions among the group were filled by someone who already had a seat on a top 300 board. This ratio peaked at 43.4% in 2006 and currently sits at 36%, Ownership Matters said.
The study found representation of women on boards has improved dramatically, rising from just 9.6% in 2005 to a third this year.
It also found that once inside the “club”, the professional lifespan of directors soars. Three-quarters of nonexecutive directors served only once and served for an average of 71 months. However, the 14% who were lucky enough to pick up a second board seat saw their tenure extended to an average of 116 months.
“Each additional seat extends a director’s service by at least two years,” and being made chair was worth an average of an extra four years, Ownership Matters said.
But the data also shows that the directors of poorly performing companies were only a little more likely to be removed than those of good performers.
“The effect is you would lose one more board member every three years,” Paatsch said.
He said this was also often due to directors resigning before a company hit the wall, rather than remaining on the board of a struggling business.
“Turnover often increases as a result of people managing their careers – jumping ship when they’re most needed,” he said.
Nathan Parkin, the co-founder of fund manager Ethical Partners, said the study proved that a relatively small group of directors controlled many of Australia’s top companies.
“It really is an invitation-only club,” he told Guardian Australia.
It “mostly invites people who are a known quantity, or who are on other boards and known, and that’s a big part of the recruitment process,” he said.
“There should be a wider pool of candidates – and there is a wider pool of candidates who are qualified and available.”
He said the small pool of directors had positives, including making it easier for them to share information on good governance practices with each other. But it could also result in a culture where boards did not properly interrogate claims made to them by management, he said.
Electing all directors annually was “probably a good practice”, he said. “It doesn’t need to lead to director turnover, necessarily, if everyone’s doing a good job.”
However, Simon Mawhinney, the managing director of contrarian investor Allan Gray, said he feared there could be “some perverse outcomes” to annual director elections.
“One of the big problems we have is this focus on short-termism,” he said.
He said this could be a problem if directors endorsed a necessary investment program that took years to pay off.
“You run the risk of coming up for re-election in a year and it looks awful,” he said.
He said Ownership Matters’ use of share price to measure underperformance was “a little bit blunt” because it did not take account of factors outside the control of boards and management.
“If you’re the CEO of an oil or gas company, then for the past five years you’ve presided over awfulness and there’s nothing you can do about that,” he said.
“But if you were to sharpen the pen I don’t think the results would change a lot, and that’s concerning.
“If people like me held these directors more accountable for capital allocation errors and sought blood when errors were made, that would increase rigour. But instead none of that happens, there’s no accountability.”
Louise Davidson, the CEO of the Australian Council of Superannuation Investors, which advises super funds on governance issues, said the research showed progress on gender diversity – but “also suggests that there is a real risk of it plateauing unless the director pool continues to grow and becomes more diverse”.
“Introducing new voices to the director pool will only strengthen good governance in Australian companies and in turn deliver stronger shareholder returns,” she said.
She said ACSI supported annual director elections because they improved accountability.
Nicola Wakefield Evans, a nonexecutive director of Lendlease and Macquarie Group who is the Australian lead for the 30% Club, a group that campaigns for more women on boards, said the increase in representation revealed by the report was “really pleasing”.
“Obviously one thing people are interested in is, are we starting to see the clubbiness for women? And I don’t think we are.”
She said women were still missing out on board positions because they lacked executive experience companies often look for. “So we do need to focus on that area.”
Wakefield Evans said she was “agnostic” on whether boards should face re-election every year. “My own view is that they will come.”
She said it meant angry shareholders would be better able to target the directors they blamed for a company’s predicament.
Currently “shareholders want to send a message but they ping the wrong directors”, she said.
“The only downside is that you then run the risk of losing the whole board, which is a huge amount of corporate memory.”