| The structure of company boards |
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| The average Irish board comprises 13.6 directors, of which four are executive and 9.5 are non-executive, writes Dominic Sutton in this analysis of Irish board structure. |
The importance of top management to corporations is in no doubt. This is equally applicable whether the focus is on superior performance or on corporate collapse. The latter is drawing particular attention at the present, considering the problems as diverse as Ahold in the Netherlands and Enron in thee United States.
When one considers the degree of attention lavished on the understanding and analysis of capital, labour and other factors of production it seems remarkable that similar attention has not been paid to corporate boards.
There is certainly a high level of academic endeavour and regulatory interest in this area, particularly with respect to corporate governance. However, away from academia and the specific issue of corporate governance the level of scrutiny and analysis is much less comprehensive and rigorous. In part this is a result of the diffuse nature of information on boards and their directors.
It is also a result of its inherent complexity, where each board has a different structure, with different numbers of executive and non-executive directors, different committee construction, belong to different industrial sectors, different stock market indices, control different sized firms and possess different networks.
It was in order to address this gap that BoardEx, a new board and director analysis system, was launched. For the first time this will allow the comparison of boards and their individual directors across the key dimensions of remuneration, tenure, roles, networks, board level committees and equity holdings. Although in operation for less than a year BoardEx already holds data on nearly 1,200 of the largest European firms and 30,000 of their directors, of which 550 are based in the United Kingdom. Soon this will be widened to include the US S&P 500 and by the end of the year the database will hold data on some 4,000 of the largest firms and approximately 100,000 company directors from around the world.
BoardEx allows corporates to compare their board structures and practices against another company, a group of companies (for example, of the same sector or size), their entire sector, their stock exchange index, or their own selection of firms from the same or other countries. In addition, the same analysis can be carried out for individual directors or corporate officers. Apart from the utility to companies themselves, this has obvious application in developing and monitoring corporate governance but is just as important for fund managers and other large investors in corporations as well as advisers to all three.
BoardEx also opens up the possibility of gaining greater insight into boards in general. At the moment such studies tend either to be sample surveys that project their findings more generally or, alternatively, take significant periods to compile. The ability to rapidly examine parameters on comprehensive sets of boards allows much greater rigour to be brought to this process. This work has only just commenced - examining the size and structure of boards - but is already yielding interesting insights.
For the purposes of this article the study used the set of UK and Ireland firms on the database (in excess of 560 firms) to determine basic statistics on the numbers of directors, their mobility and the size of the board networks. The results of this statistical analysis were then converted into frequency diagrams as well as being used to categorise firms as either ‘very low’, ‘low’, ‘average’, ‘high’ or ‘very high’ for each of the examined dimensions. The findings, with respect to the set of Irish firms, are given in the following table.
It was considered valid to compare Irish firms to the full set of UK and Irish firms on the basis of similarities in legal structure, listing requirements, business culture and in order to use a sufficiently large set to generate meaningful statistics.
The table illustrates the key statistics, where the first three columns give basic statistical measures for the various headings. The other columns divide the total number of firms into the five categories based on the statistics, as described in the previous paragraph. ‘Board Volatility’ refers to the total number of changes in the previous year compared to the current board size.
‘Size of Network’ indicates the total number of external boards on which directors sit whereas ‘Number of Interlocks’ refers to the total number of external boards on which more than one director from a given company sits. The rest of the table is self-explanatory.
It can be seen from this table that the average size of a corporate board in the UK and Ireland is nine directors, consisting of four executive directors and five non-executive directors. At the extreme there is one (Irish) board that has 22 directors; the smallest board has three directors.
Looking at the (mythical) ‘average’ Irish company, this can be seen to have a larger board than for the average of the full set of UK and Ireland boards, with a much higher non-executive director component. The ‘average’ Irish board consists of 13.6 directors (comprising four executive but 9.5 non-executive directors - the latter being bigger than for 96 per cent of firms in the full data set).
The full board is bigger than for 94 per cent of UK and Irish firms as is illustrated in figure 1, whereas figure 2 shows the impact of the larger number of non-executive directors on the percentage of executive directors comprising the total board.
Note, however, that the level for this measure still falls in the ‘average’ category. The data also suggest that concentration of contacts in Irish boards appears to occur, as the level of networks is ‘average’, whereas the interlock level falls into the ‘large’ category (bigger than for 85 per cent of UK and Irish firms). |
Dominick Sutton is director of news and commentary with Boardex Management Diagnostics.
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| Article appeared in the May 2003 issue.
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