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Wednesday, 17th April 2024
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Corporate boards need more investor representation Back  
Corporate boards are relying too heavily on ‘financial experts’ such as chief financial officers to fill directorships, say Thomas A. Bowman and Joe Kavanagh. Instead boards should look to appoint true investor advocates - directors who have spent their professional lives directly serving investors and who have demonstrated their commitment to place investor interests first - they say, particularly in Ireland where there is little or no direct institutional investor representation on Irish boards.
WWhen The Walt Disney Company added a new independent director to its board, it brought on the president and chief operating officer of YUM! brands. Similarly, Eli Lilly chose the chief executive officer of Rolls-Royce, while Sprint Corp. appointed the chief financial officer of Boeing Co. Is there a pattern here?

Investor interests must be represented in the boardroom. This should be a basic, unquestioned principle of good corporate governance. But just who is looking out for the interests of investors? By and large, it isn’t investors themselves.

Early in 2003, the Association for Investment Management and Research (AIMR) researched the composition of the boards of 338 of the largest public companies in seven major markets.

We found that only 11 per cent of the 4,500 directorships were filled by people who were identified as ‘private investors’ or affiliated with an investment firm. The percentages ranged from a low of one per cent in Tokyo (among TOPIX 30 companies) to a high of 21 per cent in the United Kingdom (among FTSE 30 companies). In the U.S., only 17 per cent of the directors at S&P100 companies could be classified as investor representatives. Worldwide, 35 per cent of the companies did not have even one director who was described on the board rosters as a private investor or an investment professional. Another 29 per cent had only one.

The Irish experience is a little different. There is low to no direct institutional investor representation on Irish boards, perhaps related to a strong perception that such representation would be seen as a conflict of interest when managing third party funds. The private investor also has low representation, with some exceptions, notably Dermot Desmond’s participation on the Greencore board. One can look to the co-op sector for examples of active board representation by the farming community, although we have seen a gradual decline in this over recent years. In any event, it is debatable whether this group truly represents the investor given that they are as much a stakeholder in the business as a shareholder.

So if investment professionals and other investors are not sitting at the board table, who is?
Very often, companies fill their boards with each others’ CEOs, CFOs and COOs. Although corporate executives should be eminently qualified to serve as board members, I question whether they bring the independence of thought and diversity of perspective that truly serve investors’ best interests. Certainly, freedom from financial, employment or personal ties to a company or its management is necessary for a director to be deemed independent. But is it sufficient? Independence of thought and action, by individuals who do not engage in ‘groupthink’ nor put blind trust in management, is the kind of independence that investors need and expect.

The fundamental problem with boards made up of corporate executives is that they will most likely identify with and make decisions like corporate executives. They haven’t spent their professional lives as investor advocates and advisors, working directly for and being compensated by the very constituents that directors are elected to represent.

In contrasst, fund managers, investment advisors, and private wealth managers are professionally trained and duty bound to look out for investing clients’ interests. Many subscribe to the rigorous AIMR Code of Ethics, which requires them always to place the interests of their investing clients first.

Another characteristic in high demand in boardrooms these days is financial expertise. To boost that expertise, companies have been seeking to add CFOs, accountants and auditors to their boards. These types of professionals obviously are well versed in preparing financial statements. However, investor interests are more closely aligned with those of investment professionals who read, dissect and use financial statements in the course of making investment decisions for their clients.

The Society of Investment Analysts in Ireland (SIAI) recognises that there are three established methods whereby institutional investors interact with the boards of businesses they invest in. Firstly through the industry association, the Irish Association of Investment Managers, who have been quite vocal in calling for better corporate governance; secondly through direct meetings with senior management where views may be expressed away from public glare; and finally through access to the senior independent director on matters of deep concern to the investor. However, the SIAI would welcome a broader net being cast when companies are seeking independent directors, and that the skill sets being sought should bring a new dimension to the business. In addition, senior independent directors appointed to boards should have the interests of the investor foremost to mind and should seek input on a regular basis from the major investor groups on matters of concern to them.

Of course, an individual investment professional might be precluded from joining a particular board because of personal or professional conflicts of interest, just as an individual CEO or CFO might be. But it would seem feasible that a fund manager could serve on the board of a company in an industry sector in which he or she does not invest client funds. A government fixed-income manager could serve on a public company board. And retired investment managers and private investors are likely to have fewer conflicts, if any at all.

Rounding out corporate boards with true investor advocates - directors who have spent their professional lives directly serving investors and who have demonstrated their commitment to place investor interests first - will bring a sorely needed investor focus to the boardroom.

About AIMR
The Association for Investment Management and Research (AIMR) is a non-profit membership organisation with more than 67,000 individual members, including the world’s 55,000 holders of the Chartered Financial Analyst (CFA) credential. It is also well known for its stringent Code of Ethics and Standards of Professional Conduct, a set of principles and guidelines that investment professionals around the world use to benchmark what constitutes fair and ethical business and investment practices. The Society of Investment Analysts in Ireland (SIAI) is a Chapter of the Association of Investment Management and Research. For further information visit www.siai.ie.

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