Shareholders suffer from independent directors
Thursday, 29 August 2013
New research from the Australian School of Business at UNSW Australia suggest independent directors have increased the pay of CEOs - regardless of how well they have performed - and in so doing cut back on shareholders' wealth.
Professor Peter Swan said "there has been a major issue since 2003 with the relative ignorance of 'independent' directors, which has been combined with their lack of incentive to monitor their own pay, which has led to rocketing pay and no incentive to perform. This has been fatal for Australian company performance."
In 2003 the Australian Securities Exchange (ASX) required that all listed firms either adopt a majority of "independent" board members without links either to management or to substantial shareholders, or if they didn't explain why not. He says "Independent directors by definition have either no prior experience with the firm, or at least no recent experience. Moreover, many are professional directors with no specific knowledge or background in the industry and their part-time nature means that acquisition of such information is difficult and is never likely to be comparable to that of full-time executives. Quite simply, they are not as good, and shareholders suffer as a result."
His study compared the performance of 969 Australian companies from 2003 to 2011. 561 changed their board structure following the introduction of the ASX's rule change.
Professor Peter Swan said "arguably, the most important and controversial corporate governance issue is board composition. Independent directors free of personal associations with senior executives and major shareholders should be more dispassionate and less biased, especially when evaluating existing business practices. However change in the rules in favour of independent directors effectively meant they were far less experienced - and they also set pay. It is noticeable that Australian companies that instituted boards with a majority of 'independent' directors in response to a 2003 change in the Australian Securities Exchange's listing rules have lost almost $70 billion in value compared with other listed companies."
Professor Swan calls the ASX's rule change "the most costly and disastrous regulatory change ever implemented in Australia by a private regulator." He adds "pursuit of private interests seems particularly likely for independent directors as, almost by definition, they have small or negligible shareholding or 'skin in the game' that diminishes any intrinsic incentive to monitor that the independent director may possess."
The analysis will be presented at the Chulalongkorn Accounting and Finance Symposium in Thailand in November 2013.
For further comment call Professor Peter Swan on 02 9385 5871, or Email firstname.lastname@example.org