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In need of a trim

LISTED UK companies are wasting millions each year publishing information that has no impact on their performance while at the same time they are being encouraged to jettison non-execs with deep experience of the company.

Our research shows that much of the governance data required in the annual reporting process is irrelevant, even though the average size of annual reports is rising by about 3% per annum. It also demonstrates that the relationship between board effectiveness and company performance is often negligible.

The review incorporates an extensive dataset for the whole of the FTSE 100 over the last four years and compares governance to multiple measures of financial performance.

It reveals that board and board committee composition, and attendance, bears no relation to performance, although high levels of attendance are almost universal. Individual cases of low attendance usually relate to non executive directors (NEDs) that are soon to depart, or non-independent directors, placed there by major investors. Therefore, reporting attendance should be removed from the code and companies should not be compelled to explain occasional non-attendance.

There was also no discernible correlation between performance and the tenure of NEDs. The code makes a point about NEDs independence where their tenure is greater than nine years. But many NEDs retire from the board when they approach this nine year horizon. What is really being lost is a wealth of experience and no benefit in independence.

Perhaps the most surprising result was the lack of correlation between directors’ shareholdings and company performance. Some FTSE100 companies go so far as to document in their annual report how many shares they expect their directors should hold. As this does not impact on performance, investors should not downgrade companies where directors hold few or no company shares.

As directors shareholding bears no relation to performance, the cost and complexity of paying part of their bonus in shares becomes unjustifiable. Payment in shares no longer hides that value from either the media or HMRC, but the costs of administering share plans are real. Where advisors can help is in closing existing share plans and developing and implementing effective and efficient cash bonus schemes

Few would subscribe to the notion that good governance is detrimental or even irrelevant. This review is, though, a step in understanding what factors are important to good governance based on analysis of the evidence.

Over the years, companies have voluntarily, or by rules and regulations, provided a huge amount of financial and non-financial data in their annual accounts that should give some insights into how well governed they are. They have also been guided by these rules into how to manage themselves. But if the correlation to performance is weak or non-existent, then companies should no longer required to spend resources collating, checking and publishing such data.

Anthony Waller is managing director of Waller and Associates

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