Directors fail to shape up

Friday 7th September 2001

Local companies have only partly adopted leading governance practices, a survey of directors from the public and private sectors on board appointments and performance measurement shows.

It is the second in a series of internet-based Ernst & Young corporate governance surveys (the first was published on July 27). The results show selection and orientation of new directors is satisfactory but after the appointment too much reliance is placed on directors remaining effective.

The ultimate objective was to conclude on the level of importance placed on appointing and monitoring effective directors.

Leading practice information was researched and used in this survey for benchmarking, predominantly from the Joint Committee on Corporate Governance Interim Report (March 2001).

Forty-four directors from a wide variety of sector participants took part in the second survey and they represented companies with a total turnover exceeding $10 billion.

When asked if formal policies existed for reviewing board membership, the majority answered No for a review by either the board (82%) or the chairman (63%).

On a brighter note, 44% of respondents said annual performance evaluations were conducted for individual directors.

But the below par trend on the evaluation of performance and effectiveness continued with 66% of respondents saying their boards did not have a focus on training.

When asked in what form companies set out individual director expectations and how these were measured, the clear answer was that standards were not established or set at all.

Asked what approach they took for new directors, 59% said they had a formal orientation and education programme while 41% had a "learn on the job" approach.

The second focus of the survey was on-board composition, nomination and the appointment of members to committees. The value of non-executive directors was recognised with a predominance of non-executive directors; 43% had no executive directors while 35% had only one.

The majority of boards have five to eight non-executive directors. Aligned with leading practice, 93% said the chairman was a non-executive director.

Companies are behind international trends when it comes to nominating and appointing directors: 79% said their companies did not utilise a nominating committee, 36% said the whole board determined nominations while 24% said the chairman decided.

Companies operate with predominantly two sub-committees: audit and remuneration. Seventy per cent of respondents have formal policies for appointments to the audit committee.

However, there would appear to be little formality with regards to the selection process to other sub-committees.

Asked what directors considered most important when appointing directors, 50% said "business experience."

Less importance was given to the other options of "mix of talent," "shareholder nomination" and "business contacts."

- Shona McMahon (manager) and Ben Palmer (partner), business risk consulting, Ernst & Young

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