Next time a Company Chief Executive choses to write a sentence like this:

“The board gave me a mandate to develop a plan to improve, on a sustainable basis, the group’s commercial and operational performance, in order to deliver better financial results for shareholders over the medium to long term and to develop an execution model that our new CEO, once appointed, can immediately leverage without constraining any potential strategic changes that they may wish to implement.”

Or this:

“Employee engagement is key to the progress we are making here, and our people are encouraged to share their views and ideas on key topics through regular conversations hosted by our leaders, including myself and my executive team”.

They may want to ponder the words of the founder of JD Wetherspoon (LON: JDW), Tim Martin: the UK corporate governance code “has led to the creation of long and almost unreadable annual reports, full of jargon, clichés and platitudes - which confuse more than they enlighten.”

With these two examples to hand (taken from the 2018 annual reports of ConvaTec and GlaxoSmithKline, respectively), it’s hard to disagree with Mr Martin. Annual reports from UK PLC are often painfully formulaic – a reflection of the check box regulation which governs corporate activity.

Like Mr Martin, we acknowledge that a corporate governance code is necessary for the responsible management of listed British companies. But we are also worried that the firm set of rules which oversees leadership, company purpose and audit is more of a hindrance than it is a help in the effective management of companies.

That’s most noticeable in the make-up of company boards, which the code states should include at least 50% non-executive, independent directors who have been with the company for less than nine years. Under the terms of the regulation, these non-executives have a “prime role” in appointing and scrutinising the performance of senior managers. Mr Martin believes that, “by vesting so much power in non-executive directors, the system is also disenfranchising executives and the workforce - the people who have real expertise and are the cornerstone of business success.”

He has fair reason to take umbrage with the code. In 2019, Wetherspoons’ largest institutional shareholder, Columbia Threadneedle did not support the re-election of two of the company’s long-serving directors, simply because they had exceeded their nine-year limit on so-called ‘independence’. Rather than acknowledge the depth of knowledge and experience these board members had brought to the company, Columbia Threadneedle had chosen to comply with a box-ticking exercise which puts more emphasis on independence than it does experience.

Mr Martin argues that the power given to independent board members has led to share price performances which have “veered between poor and catastrophic”. He points to Northern Rock, HBOS, Carillion, and Thomas Cook – all companies which were in full compliance with the code before their demise. He also makes the worrying point that none of the UK’s big banks have a non-executive director with experience of the global financial crisis, because they have all adhered to the nine-year non-executive rule.

On the other side of the argument are companies which have not given non-executive independent executives more power than the workforce, customers or executive management and have performed far better of the long term. FullersDart Group and Wetherspoons itself have an average board member tenure of between 10 and 15 years and have all beaten the market by a considerable amount in the last decade. Tesco, on the other hand, has two executive directors and 11 non-executive directors with an average tenure of 3.7 years. Its share price has fallen 43% in the last ten years.

But has Mr Martin simply highlighted the companies which support his point or is he right in saying that long-standing boards can be good for company performance? We have compared the tenure of senior leadership with share price performance in the 28 British companies in our two portfolios and, as the chart below shows, length of tenure does have a strong positive correlation with share price growth.

 

 

Board members at Games Workshop (LON: GAW) – far and away the best performing stock in our portfolio over the last ten years with a share price rise of over 1700% – have an average tenure of 7.1 years, while IG Group’s (LON: IGG) board, which has reported only a 73% share price rise in the same period, have served an average of 2.6 years. All three executive directors have been with the company for less than three years. Incidentally two of Games Workshop’s non-executive directors had served more than nine years at the last vote. At the time, the company said, “the requirement for members of the board to have a real understanding of, and empathy with, the Games Workshop Hobby to be a point in favour of retaining the experience which the board currently has.”

Again, this evidence is anecdotal – 28 companies still isn’t a large enough sample size to say with any confidence that senior management longevity sparks better performance. But common sense does. Board members who have knowledge and experience within the companies where their opinions carry weight are surely more likely to aid better performance.

Tim Martin is probably right: the UK Corporate Governance Code needs a rethink. 

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