How to assess what’s happening behind closed doors? One of the key topics for any investor is a company’s governance. The board plays an important role in this respect. As shareholders often only have very basic information about the performance of supervisory boards, we spoke directly with the chairmen and lead independent directors of several companies for over three years. We found that transparency has improved, providing investors with some more insight into the quality of boards.
The publicly listed company, in which ownership and management are separate, is inherently faced with an agency problem. This means that management’s actions and interests might not always be aligned with the interests of shareholders or other stakeholders. In most markets, the board has a role in countering this problem. It supervises management in the best interest of shareholders and other stakeholders.
From many board members, we hear that responsibilities have increased. The time when people could easily sit on a double digit amount of boards is over. Depending on the market, they are also expected to assess company risk management and compliance systems, set appropriate remuneration and oversee accounting practices.
To meet all of these expectations, people with a variety of qualities are needed Nomination committees therefore need to allocate sufficient time and resources to find appropriate board members.
Many critics have attributed at least part of the financial crisis to poor governance practices. Perverse incentives for top management, a lack of risk oversight and poor checks and balances are often cited as causes of irresponsible corporate behavior in the banking industry. Nevertheless, financial companies often score well on many corporate governance practices such as independence criteria for board members, pay-for-performance structures and transparency via all sorts of reporting. Yet box ticking will not help investors to gain good insight into the quality of corporate governance. A different approach is needed.
We started an engagement project with insurance companies and banks in 2014, with the aim to understand and improve 1) the quality of public disclosures and biographies, 2) board nomination processes, 3) independence and objectivity in corporate boards, 4) diversity (in a broad sense) and 5) self-evaluations of board performance.
A proper analysis of a board takes a lot of time, but much insight can already be gathered from public information. How many of the independent board members have credible experience in the industry? Does the board appear entrenched, judging by average tenures? Do the backgrounds of board members credibly reflect a company’s market? Sometimes companies provide useful disclosures that help investors. Often however, these disclosures are formalistic, which makes this analysis hard to carry out.
Much of our work has focused on making sure companies have good nomination policies. We have found that companies do not need prescriptive rules for nomination, but require guidelines, planning and sufficient time to start a search process. It requires constant attention from the nominations committee and frequent reviews of board composition in terms of skills, gender, experience, etc.
Having a strong composition doesn’t necessarily guarantee the board is going to work well. It simply means that on paper it hasthe right capacities to do so. In practice, shareholders have very little information about the performance of supervisory boards. Whereas executive management can often be judged on several KPIs and have substantial exposure in the media, supervisory board members mainly operate behind closed doors.
Supervisory boards are increasingly reporting on their activities and the evaluation of their performance. A trained eye can read between the lines and assess whether boards are doing more than rubber stamping. Still, the best way to gain real insight is to speak to board members themselves. During our engagement project, we managed to speak with the chairmen and lead independent directors of several boards. These meetings allowed us a peek into the boardrooms of our investee companies and rendered the most fruitful conversations.
All companies met local standards for the required number of independent directors. We had concerns, however, about companies that traditionally held on to dual mandates (CEOs who are also the Chairman of the board) and the level of industry experience of the independent board members. Solvency II helped our cause to a certain extent, by requiring splitting key responsibilities for top management which had led to dualism in several cases.
We have seen positive developments in the insurance sector. Transparency and disclosure have improved markedly, making it easier for investors to gain a picture of board composition. Disclosure of board self-assessments has also become more prevalent, giving investors a look behind the scenes. And as for those candidates who gain a seat on the board, whilst more pressure is placed on their time, they also tend to have more relevant skills.
The content displayed on this website is exclusively directed at qualified investors, as defined in the swiss collective investment schemes act of 23 june 2006 ("cisa") and its implementing ordinance, or at “independent asset managers” which meet additional requirements as set out below. Qualified investors are in particular regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes and central banks, regulated insurance companies, public entities and retirement benefits institutions with professional treasury or companies with professional treasury.
The contents, however, are not intended for non-qualified investors. By clicking "I agree" below, you confirm and acknowledge that you act in your capacity as qualified investor pursuant to CISA or as an “independent asset manager” who meets the additional requirements set out hereafter. In the event that you are an "independent asset manager" who meets all the requirements set out in Art. 3 para. 2 let. c) CISA in conjunction with Art. 3 CISO, by clicking "I Agree" below you confirm that you will use the content of this website only for those of your clients which are qualified investors pursuant to CISA.
Representative in Switzerland of the foreign funds registered with the Swiss Financial Market Supervisory Authority ("FINMA") for distribution in or from Switzerland to non-qualified investors is Robeco Switzerland AG, Josefstrasse 218, 8005 Zürich, and the paying agent is UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zürich. Please consult www.finma.ch for a list of FINMA registered funds.
Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco/Robeco Switzerland product should only be made after reading the related legal documents such as management regulations, articles of association, prospectuses, key investor information documents and annual and semi-annual reports, which can be all be obtained free of charge at this website, at the registered seat of the representative in Switzerland, as well as at the Robeco/Robeco Switzerland offices in each country where Robeco has a presence. In respect of the funds distributed in Switzerland, the place of performance and jurisdiction is the registered office of the representative in Switzerland.
This website is not directed to any person in any jurisdiction where, by reason of that person's nationality, residence or otherwise, the publication or availability of this website is prohibited. Persons in respect of whom such prohibitions apply must not access this website.