A major international review has found no empirical evidence to support the corporate governance ‘best practices’ supported by organisations such as the Australian Stock Exchange and the Australian Institute of Company Directors.
A major international review has found no empirical evidence to support the corporate governance ‘best practices’ supported by organisations such as the Australian Stock Exchange and the Australian Institute of Company Directors.
The newly published paper in the British Journal of Management reviewed more than 200 studies undertaken over the past 70 years to test the ‘accepted wisdom’ in corporate governance.
For instance, it reviewed the impact of having independent directors.
“We found no evidence of a relationship between board composition and firm financial performance,” the study concludes.
Similarly, it found that companies that split the chairman and chief executive roles do not outperform companies with a single executive chairman.
It also tested the view that companies perform better if their directors and executives are given an equity stake in the business, so their interests are aligned with all shareholders, and once again found no supporting evidence.
“When considering the structural independence argument … and the alignment of interests arguments, as captured by equity ownership in the firm, we would appear to have hit the proverbial ‘its one, two, three strikes you’re out’,” the study says. “There is simply no evidence, in the aggregate, that these governance indicators are associated with enhanced firm financial performance.”
Perhaps surprisingly, the authors of the study, US academics Catherine Dalton and Dan Dalton, then assert that “it is premature to abandon efforts to install greater independence in the boardroom”.
They strongly support the concept of appointing a lead independent director, especially in companies where the chairman and chief executive roles are held by one person.
This practice is rare in Australia, with Evans & Tate and Mermaid Marine among the few companies to have a lead director.
“In our experience, the installation of a lead independent director has yielded numerous benefits,” the study says.
The authors also said they are strong advocates of the power of effective processes in the boardroom.
“No amount of structure can overcome a failure in process,” they say.
Many boards are considered not effective simply because the board agenda, coupled with highly structured management presentations, leaves little time for discussion.
They also believe that directors who question management and disrupt the carefully scheduled agenda can be viewed as obstructionist.
Another problem they have observed is the lack of ‘team building’ among directors, who are meant to work together.
“Lastly there is simply no substitute for preparation and an honest desire to discharge one’s duties responsibly and effectively,” the study says.
“Ultimately, a board and its effectiveness are defined by the integrity and character of board members.
“These are characteristics that cannot be legislated or mandated by oversight bodies.”
