New research focuses on diversity of expertise on Australian boards

New research focuses on diversity of expertise on Australian boards

Governing for the long-term: Board composition and diversity
PricewaterhouseCoopers 2015 Annual Corporate Directors Survey, October 2015 

Why Companies Need To Build More Diverse Boards
Forbes, August 2015

The diversity of expertise on corporate boards in Australia
Accounting & Finance, AFAANZ, May 2015 

A recent paper, “The diversity of expertise on corporate boards in Australia”, provides new insights into how diversity of professional expertise on Australian boards relates to firm value and performance.

The researchers, from the University of Queensland Business School and Illinois State University College of Business, investigated whether there is a positive relationship between diversity of professional expertise on boards and firm value.

The methodology involved analysis of cross sectional data collected from 8,791 directors across 1,548 ASX-listed firms during 2007, as well as an event study that evaluated stock market reactions to new director appointments during 2004 – 2007.

Directors were categorised into the following two groupings of professional expertise:

• specialist business expertise: including lawyers, consultants, accountants, bankers and other CEOs; and
  
  
• other expertise: including executives, scientists, engineers, politicians, academics and medical doctors.

While the researchers found no overall relationship between professional diversity and firm value, they made a number of findings about how the two groupings of professional expertise related to firm value and performance:

• Shareholders benefit when boards have specialist business expertise. The researchers found that the expertise of lawyers, consultants, accountants, bankers and other CEOs on boards is valued more by shareholders than any other type of expertise. They found that shareholders react positively to such directors being appointed to the board, particularly in the energy and materials industries. The researchers suggested that if boards do not have directors with specialist business expertise, they should diversify their boards to include such directors.
   
• Firm value and performance is lower if firms diversify beyond specialist business expertise. The researchers found that broader diversity beyond lawyers, consultants, accountants, bankers and outside CEOs is associated with lower firm value and performance.

What are the implications of this study for Australian boards and directors?

A board comprised of directors with diverse professional backgrounds may have access to a broader range of skills, perspectives and problem solving abilities, which may improve board performance.

This study challenges this belief by suggesting that too much diversity (that is, beyond lawyers, consultants, accountants, bankers and other CEOs) may be associated with negative firm value and performance.

It is important to note the study’s limitations. For example:

• it focuses on data from 2007. Accordingly, it does not fully address how expertise needs may change over time, including in varying economic conditions and over different stages of a company’s lifecycle;
  
  
• there does not appear to be a clear rationale for the chosen groupings of professions;  and
  
  
• it does not evaluate the effectiveness of any particular type of professional expertise on firm performance or value.

Other studies have pointed to the benefits of broader professional expertise on boards.

A team of university researchers in the US examined the performance of more than 2,000 companies from 1998 to 2011. The study found that more diverse boards (including boards with diverse expertise) were more likely to pay dividends to shareholders and less prone to risk taking than homogenous boards. The study is yet to be published.

Spencer Stuart has suggested that diverse professional expertise plays a key role in the pre-IPO process. It suggests that companies which have plans to list publicly should consider establishing boards which include directors with strategic, financial, digital and international business expertise.

PricewaterhouseCoopers (PwC) has recently released its 2015 Annual Corporate Directors Survey, which contains a section on board composition and diversity. The PwC Report examined the responses of 783 public company directors and found that the most desirable director attributes were financial expertise (91%), industry expertise (70%), operational expertise (66%) and risk management expertise (62%).