Do entrenched boards help or hurt stock performance of publicly held companies? We found that the involvement of entrenched boards, particularly at family-dominated firms, was a positive attribute over the five-year period ending March 2015, in both the U.S. and emerging markets.
We examined share performance of companies with entrenched boards in both the U.S. and emerging markets. We define entrenched boards as composed of directors with long tenure and advanced ages who often serve primarily the interests of family owners, company founders or other dominant shareholders. We looked at both family firms, where a family member is CEO or Chairman, or family interests are actively represented on board, and founder firms, where a company founder is CEO, Chairman or director.
Our key findings:
- Over the five years ending March 2015, companies with entrenched boards have on average significantly outperformed their non-entrenched peers (Exhibit 1).
- In the U.S., however, only family firms with entrenched boards outperformed, and the performance of entrenched founder firms and companies overall generally suffered (Exhibit 2).
- Performance differences were greater among emerging markets companies, where family firms outperformed in general but turned in the highest returns when served by entrenched boards (Exhibit 3).
- Entrenched boards are less prevalent in markets such as the U.K. and France, which have more stringent tenure restrictions. If U.S. companies adhered to current U.K. standards for assessing director independence, as many as 30% of U.S. companies would fail to attain independent majority status.
Exhibit 1: Total returns for all companies
Average 5-year returns for all rated companies
Exhibit 2: Total returns for all US-rated companies
Average 5-year total returns for all US-rated companies
Exhibit 3: Total returns for all Emerging Markets-rated companies
Average 5-year total returns for all Emerging Markets-rated companies
A number of countries have now adopted director independence standards based on length of tenure, effectively reducing the number of entrenched boards to be found in those markets. In France, the standard is quite explicit, with directors no longer qualifying as independent once they have served for more than 12 years. The U.K. standard applies a stricter tenure standard, but companies have latitude to keep non-executive directors who have served for more than nine years if they provide an explanation.
This approach has begun to gain traction in the U.S. as well. If the U.K. standard were adopted in the U.S., nearly 43% of all U.S. non-executive directors would be considered non-independent, up from less than 11% currently. At the company level, the number of U.S. companies whose boards would be considered to have less than a majority of independent directors would rise from 212 to 830, an increase of 618 companies out of the total of 2,789, and a percentage change from under 8% to nearly 30%.
Read the paper, “Entrench Boards: Director Tenure and Performance.”