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Research into the effectiveness of FTSE 100 boards and their chairmen has found that 100 per cent of these companies have chosen not to disclose or do not have their own measure of success as boards.

The study, by board advisory firm Armstrong Bonham Carter, examines in detail the boards of every FTSE 100 company and their chairmen.

Tom Bonham Carter, a partner at the Armstrong Bonham Carter, explains that we have seen the demise in reputation of some great FTSE 100 companies over this year.

“Chairmen and their boards always claim they are effective. In the five years to the end of July this year, by contrast, 12 per cent of FTSE 100 companies produced a return less than that they might have earned if invested in cash, and 40 per cent produced returns less than the FTSE 100 index,” Bonham Carter adds. 

Combined Code

This begs the question: should investors simply accept this is the risk of equity investment, demonstrating the efficiency of the capitalistic system? Or should they question whether FTSE 100 companies are competently led?

Certainly understanding the effectiveness of the leadership of FTSE 100 companies is not easy. This is largely due to the fact that the work of boards is subjective and generally boards do not define measures of success for their work outside of goals for the business as a whole.

The Financial Reporting Council’s combined code of corporate governance says the chairman is responsible for ensuring the company has an effective board.

The code says much about the composition of the board. It defines an independent director, how to recruit board members, train them, appraise them and gives details for their re-election. It also defines requirements for remuneration, internal controls and communications with shareholders. Yet nowhere does it define what exactly an effective board is.

Shareholder value

What are the characteristics of an effective board so employees and investors know when they have one? It is understandable that chairmen have generally opined that their board is effective, as the large majority of board work is subjective and no specific measures are used to assess it.

It is also reasonable that the announcement of business plans, the recruitment of executive teams and the publication of results can provide some means for stakeholders, be they employees or investors, to assess the effectiveness of the board’s leadership.

Generally the workings of the board remain opaque to these stakeholders, however, who are then forced to wait until the strategy plays out to see whether it delivers shareholder value or not.

An ineffective board will destroy value for all stakeholders. An effective board will create great value for employees, shareholders and society.

Nearly one in four chairmen has little relevant experience in their previous careers of the industry in which their current company operates. Whilst absence of relevant industry experience does not automatically mean the chairman will be ineffective, it can be a significant risk to the leadership of the company.

Contrary to the general perception that boards are a cosy club, 87 per cent of companies have boards where the chairman is independent of the other members of the board and has not therefore populated them with colleagues that he or she has previously worked with at other organisations.

Lack of clarity 

The study found that 18 per cent of companies lack any clear aim, whilst 28 per cent have a clear aim but these are so formulaic that they appear unachievable because they are so unclear.

This lack of clarity over the aim of the company risks confusion in the development of the strategy and confusion amongst employees in achieving that strategy. It also nurtures confusion with shareholders. A clear aim will be instrumental in winning shareholders’ support for a board and its strategy.

In 40 per cent of companies the CEO has no record of value creation. Whilst this may be a result of the fact that the CEO is new to the role, this is a clear risk to the successful implementation of the strategy.

Nine per cent of companies have suffered from a delay in IT or an operational project, which may detrimentally effect the achievement of the strategy.

The task of properly and effectively communicating the aim and the business strategy to employees, shareholders and other stakeholders may well be delegated to the CEO and the executive team.

The board could find, if they spent time assessing whether the employees do know and understand the business strategy, that it is a leading indicator to the successful implementation of the business strategy.

Investors may also welcome this early indication of the effectiveness of the board in helping them to select their investments and supporting the executive team and strategy.

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Related links

• Armstrong Bonham Carter