RiskMetrics Group

RiskMetrics Group

Assessing director performance

30 March 2009

www.riskmetrics.com 2

The view from the board

"In considering John Smith’s potential appointment to the Acme Board, Directors were aware of the issues facing Failed Co. The Nominations Committee met and discussed John Smith’s suitability at length, as did other Directors. Directors satisfied themselves that John was an appropriate candidate and that has proven to be the case since he joined the Board.“

Source: Company response to RiskMetrics, 2008

Any questions? Is this a good enough answer for shareholders to rely on?


Assessing performance: The story so far

Accountability: Allco incumbents reelected with 92.4 percent at

the 2008 AGM; average against at top 100 94.1 percent in

2008

Board selection: Absent owners, more then half of

appointments from within existing S&P/ASX 100 pool since

2005

Imperfect information: Collective decision making, individual

elections

The problem of resignation: Information asymmetry


Assessing director performance: Why bother

Problematic: Boards are collective but elected individually

Director behaviour and participation not visible to shareholders

Shareholders – especially those with fiduciary duties – are

obligated to try and assess the performance of their

representatives on company boards

Electing – and removing - directors is shareholders’ core right

and major protection


Getting scientific

Looked at performance of directors on boards of S&P/ASX 100

companies continuously listed between 1 September 2000 and

their 2007 financial year end

Universe of 49 companies, 649 board seats

Attributed portion of company TSR – relative to main GICS

sector performance – to each director

Weighted by director’s proportion of remuneration paid to all

NEDs during time on board


Getting scientific

Performance from date of appointment

Dividends not reinvested

Executive directors excluded

Total score across multiple boards is simple average

106 individuals had multiple board seats during survey period


The results: Multiple board seats

Median value add: 3.22 percent

Top quartile: Starts at 10.59 percent

Bottom quartile: Starts at -0.3 percent

37 ‘multiples’ with positive ‘alpha’ across all boards

10 ‘multiples’ with negative ‘alpha’ across all boards


The top 10

Elizabeth Bryan (Caltex, Westpac) 81.7 percent

Dick Warburton (Caltex, Tabcorp) 77.9 percent

David Simpson (Aristocrat, CSL) 75.4 percent

Kevin McCann (Macquarie, Origin) 49.2 percent

Ian Johnson (Leighton, Newcrest) 47.2 percent

Penelope Morris (Aristocrat, Mirvac) 43.3 percent

John Cloney (Boral, Brambles, QBE) 29.6 percent

Ian Blackburne (CSR, Suncorp-Metway) 27 percent

James Strong (IAG, Qantas, Woolworths) 26.1 percent

Roland Williams (Boral, Origin) 25.4 percent


The dream board: As selected by the AFR, 2008

Don Argus -0.8 percent

David Crawford 2.7 percent

John Schubert 5.9 percent

David Gonski 3.7 percent

Michael Chaney 1.3 percent

Robert Savage Not in sample

Kevin McCann 49.2 percent

Leigh Clifford Not in sample


A point in time

Director performance is a bit like the French Revolution

As an example:

- Rio directors as at 31 December 2007 look great

- Peter Willcox at AMP: Adjusted TSR is heavily negative

So, looking at TSR at a point in time by itself is not the answer

But how else can shareholders empirically assess performance?


Where next

Let’s start the conversation about director performance

Open to suggestions of a better method of assessment

Our commitment: An update of the numbers for 2008 shortly


Q&A

Martin Lawrence

[email protected]

RiskMetrics Group

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