Bored with the Board
Can a firm’s performance be linked to the Board? In some instances, it seems it can. In an article in HBR (April 2014, How Much Board Turnover is Best?) the authors, George M. Anderson and David Chun shared the outcome of a study of board turnover and shareholder returns for the S&P 500 companies from 2003 to 2013. The pattern of their findings were intriguing:
- Companies that replaced three or four directors over a three-year period outperformed their peers, suggesting an optimal amount of turnover.
- Most boards miss this optimal zone: In their study, board turnover fell outside that three-year period about two-thirds of the time.
- The worst performing companies tended to be either those with no director changes at all in three years or five or more changes during the same period.
The bottom line is that companies and investors do best with moderate turnover. Boards today are more engaged, and attending to turnover and how it may affects performance is another way they can be sure they are serving a firm’s best interest.