Brian Gaynor: Shallow pool of directors needs deepening

New Zealand should seek to diversify its boards. File photo / NZ Herald

Board composition, which plays an important role in company performance, does not receive enough analysis and scrutiny in New Zealand.

That is unfortunate because poor board composition was a major contributor to many of the post-1987 sharemarket crash corporate failures, the huge losses suffered by finance company investors and the disappointing overseas performance of a number of our large listed companies.

There is no magic formula as far as board composition is concerned but a number of studies allow us to compare New Zealand with Australia and European countries.

These include: Heidrick & Struggles' European Corporate Governance Report 2011; Korn/Ferry International's 2010 Board of Directors Study, Australia and New Zealand; and the Australian Council of Super Investors' Board Composition and Non-Executive Director Pay in the Top 100 Companies: 2009.

These reports cover stock exchange listed companies only.

One of the first issues to look at is the number of overseas directors. This is important because of increased globalisation and New Zealand companies need to look overseas if they want to grow.

The Heidrick & Struggles report shows that 24 per cent of all directors in over 400 companies in 15 European countries are non-nationals.

This goes from lows of 10 per cent in Spain, 11 per cent in Germany and 12 per cent in Italy to 40 per cent in the UK, 47 per cent in the Netherlands and 53 per cent in Switzerland.

London's Financial Times made a big issue of the fact that 40 per cent of the Top 50 UK company directors were from outside the country compared with only 26 per cent in 2005. It quoted Jonathan Day of Heidrick & Struggles as saying: "The trend towards more international boards is being driven by globalisation, particularly companies seeking non-executive directors who can provide insights into their overseas operations."

It is much easier for English speaking countries to appoint non-national directors because English is the more widely used corporate language whereas language can be a major problem if non-nationals are appointed to Spanish, German and Italian boards.

The accompanying table contains board composition data for NZX 15 Index companies, essentially the largest listed NZX companies. The three property groups - AMP NZ Office, Goodman Property Trust and Kiwi Income Property Trust - have been excluded.

The data shows that 19 of the 86 directors of these 12 companies are overseas domiciled. This is 22 per cent of the total compared with 24 per cent for the 15 European countries.

However, New Zealand's overseas directors seem to have been appointed because of shareholder considerations rather than their ability to contribute to overseas expansion.

Contact Energy has five non-nationals because it is controlled by Australia's Origin Energy, Nuplex also has a majority of overseas directors because it has essentially moved to Australia, and Sky TV has a major overseas shareholder.

The three companies with the largest overseas activities - Fletcher Building, Fisher & Paykel Healthcare and Mainfreight - have only two non-nationals between them with the latter two having none.

Why is this, why don't companies with major overseas activities have more non-national directors?

Why don't Delegat's, Pumpkin Patch, Rakon and Skellerup have at least one overseas director?

There are more than 530,000 born New Zealanders living in Australia. Surely there are at least 10 or 20 Australian based New Zealanders with the business knowledge and experience to make a positive contribution to our company boards?

We have a strong bias towards locals when it comes to director appointments. For example all nine of the 12 companies based in Auckland have a majority of Auckland based New Zealand directors whereas the three companies outside Auckland - Contact Energy, Infratil and Ryman Healthcare - have only one Auckland director between them.

New Zealand also has a relatively low level of executive directors, 13 per cent compared with 18 per cent for the top 50 Australian companies. Mainfreight is the only company with more than one executive director. New Zealand has fewer executive directors because many of our largest listed companies are either mature or former Crown owned entities while younger, entrepreneurial entities tend to have more executive directors. For example, the IT industry usually has the highest percentage of executive directors but few of these are listed on the NZX.

The average tenure of a director of a top 12 New Zealand company is 7.2 years at present compared with 6.1 years in Australia and 5.7 years in Europe. The average tenure in the UK is 5.2 years and only Belgium, with 7.6 years, is higher than New Zealand.

If Mainfreight, which has an average tenure per director of 20.4 years, is removed then our average drops to 5.9 years.

Mainfreight is the standout in our 12 company group because it has no non-national directors, it has more executive directors than the other companies and its average tenure is one of the highest in Australasia. Chairman Bruce Plested is extremely loyal to his fellow directors but there will come a time when the Mainfreight board will have to be refreshed with younger faces.

The average age of a director is 60 in Australia and New Zealand, and 58 in Europe. Our average age is relatively high because of long tenure and we have few executive directors. Executive directors are usually younger than non-executive directors.

Heidrick & Struggles notes: "There is no doubt that encouraging senior executives to take up directorships somewhat earlier in their careers [something which many of the large corporations now do] is a positive development. The benefits of appointing younger directors are well known but many boards are concerned about appointing executives with no prior board experience."

Unfortunately none of the 12 companies on our list have executives from other listed New Zealand companies on their boards nor are any of the CEOs of these 12 companies on the boards of other listed companies. This is unfortunate as our corporate governance would be strengthened, and we would deepen our pool of directors, if CEOs of NZX companies had one outside listed company directorship.

An issue attracting a great deal of attention at present is the number of women on company boards.

Women represent 12 per cent of non-executive directors in New Zealand, 10 per cent of the Top 300 Australian companies, 16 per cent of the Top 50 Australian companies and 12 per cent in Europe. The four Nordic countries have between 18 per cent and 33 per cent women board members while Italy and Portugal are at the bottom with 3 per cent and 4 per cent respectively.

Gender diversity has been imposed by quotas in some countries with French boards required to have 40 per cent of women directors by 2017. This will be a huge challenge as good directors are hard to find and women currently represent only 11 per cent of French directors.

Gender diversity is a particularly difficult issue in New Zealand because we have a shallow pool of director talent to begin with. Probably the best way to find more female directors is to appoint them as executive directors and to look for New Zealand women living overseas with successful business records.

None of our major companies has female executive directors nor have they overseas based non-executive women directors.

The clear message to listed New Zealand companies is that they should look to strengthen and diversify their boards by appointing more executive directors; more overseas based non-executive directors and younger directors, including women. These appointments would deepen our shallow pool of directors.

Brian Gaynor is an executive director of milford asset management.