Judging the Quality of a Board of Directors

[Country Lad]

When reading @Garpal Gumnut’s post in the Qantas thread it reminded me of the directors I had met who were, let’s say, NOT sufficiently competent. We invest in companies overseen by directors with capabilities (or incapabilities) we cannot assess.

Over the years I have been a director of 12 public companies and government corporations. I am a Founding Fellow of the Australian Institute of Company Directors, (shows my age) and my forte was corporate governance.

Consequently, I have met/worked with many directors of large companies whose competencies ranged from outstanding to downright hopeless. I made it a habit to look for their CV or the description in the various annual reports for of the ones I met and considered NOT sufficiently competent. All read extremely well and to a casual observer would appear capable to adequately steer the company to success.

I served on one board with 2 directors who were friends and were on an ASX listed company (with another friend) on which all had served for over a decade (one as an executive Chairman). That company had not grown over that period. It had both paid a miniscule dividend and raised funds every now & then. This is not an isolated case - a very comfortable arrangement which is prevalent in many public companies.

The other issue is the appointment of a CEO and senior executives. Things have changed somewhat since my time but in many cases there is not sufficient due diligence to ensure the best person is appointed. There was one company where myself and another director had to fight hard for the rest of the board to agree to terminate a CEO and appoint one more capable. There are the 2 obvious reasons why boards persist with an underperforming CEO.

Unfortunately it is still the case that many companies are happy to ignore the KPIs of underperforming CEOs, still give them big bonuses even though the performance is well below par. Case in point is @Garpal Gumnut’s Qantas post both present and past CEO..

So here we are, investing in companies where we are in fact bystanders and cannot really assess the quality of the people in whose hands we have placed our investment.

Best is to ignore the people involved and assess the performance of the business itself, the market it is in, the product or the technology and all other aspects of the business.

Heaven forbid, I should really look more at the fundamentals.

 

[Sean K]

When reading @Garpal Gumnut’s post in the Qantas thread it reminded me of the directors I had met who were, let’s say, NOT sufficiently competent. We invest in companies overseen by directors with capabilities (or incapabilities) we cannot assess.

Over the years I have been a director of 12 public companies and government corporations. I am a Founding Fellow of the Australian Institute of Company Directors, (shows my age) and my forte was corporate governance.

Consequently, I have met/worked with many directors of large companies whose competencies ranged from outstanding to downright hopeless. I made it a habit to look for their CV or the description in the various annual reports for of the ones I met and considered NOT sufficiently competent. All read extremely well and to a casual observer would appear capable to adequately steer the company to success.

I served on one board with 2 directors who were friends and were on an ASX listed company (with another friend) on which all had served for over a decade (one as an executive Chairman). That company had not grown over that period. It had both paid a miniscule dividend and raised funds every now & then. This is not an isolated case - a very comfortable arrangement which is prevalent in many public companies.

The other issue is the appointment of a CEO and senior executives. Things have changed somewhat since my time but in many cases there is not sufficient due diligence to ensure the best person is appointed. There was one company where myself and another director had to fight hard for the rest of the board to agree to terminate a CEO and appoint one more capable. There are the 2 obvious reasons why boards persist with an underperforming CEO.

Unfortunately it is still the case that many companies are happy to ignore the KPIs of underperforming CEOs, still give them big bonuses even though the performance is well below par. Case in point is @Garpal Gumnut’s Qantas post both present and past CEO..

So here we are, investing in companies where we are in fact bystanders and cannot really assess the quality of the people in whose hands we have placed our investment.

Best is to ignore the people involved and assess the performance of the business itself, the market it is in, the product or the technology and all other aspects of the business.

Heaven forbid, I should really look more at the fundamentals.

From my research of boards and management teams it seems to be mostly jobs for mates, which is what you'd expect. Management teams need to know and trust each other so individuals get recruited based on relationships. Seeing the same names on multiple boards all linked to the same companies might look like a good thing, but the question is, have they actually succeeded? I've backed a few companies at the moment simply based on the previous success of boards and management. I'm deep in the red on a couple of them...

In a recent Rick Rule interview he said he wished he had have just stuck with investing in the one or two people who had been serially successful.

Right now, I wouldn't go anywhere near QAN's board and management.

 

[divs4ever]

From my research of boards and management teams it seems to be mostly jobs for mates, which is what you'd expect. Management teams need to know and trust each other so individuals get recruited based on relationships. Seeing the same names on multiple boards all linked to the same companies might look like a good thing, but the question is, have they actually succeeded? I've backed a few companies at the moment simply based on the previous success of boards and management. I'm deep in the red on a couple of them...

In a recent Rick Rule interview he said he wished he had have just stuck with investing in the one or two people who had been serially successful.

Right now, I wouldn't go anywhere near QAN's board and management.

well if Alan had of been recruited from outside the company as CEO with a 'rockstar CV ' i might have cut the board ( and management) more slack , but he was promoted internally

so sadly i agree

i hope they don't absorb REX in an attempt to make a regular profit

 

[Dona Ferentes]

there's a definite element of sinecure for some, a nice little earner in pre-retirement, and the current craze is to appoint women to the positions. Some seem to hang around only until they get a better offer.

 

[divs4ever]

there's a definite element of sinecure for some, a nice little earner in pre-retirement, and the current craze is to appoint women to the positions. Some seem to hang around only until they get a better offer.

yes i have been dismayed in some companies , at the rapid acceptance of take-over deals , i often wonder in such cases if the take-over includes jobs for the (ex) directors

personally i don't care who gets appointed as long as they add value ( knowledge input ) to the company , the wretched union ( super ) funds are among the worst offenders ( jobs for the high-ranking members )

 

[Country Lad]

there's a definite element of sinecure for some, a nice little earner in pre-retirement, and the current craze is to appoint women to the positions. Some seem to hang around only until they get a better offer.

There was a real issue regarding women appointees in my time and this was a bit before it became fashionable for equal representation. On three of the boards on which I served, two had acquired a female director prior to my appointment. It was really a case of appointing a woman for the sake of it, without going through the process of finding the best qualified, but they were on other boards so the decision appeared easy. Their performance left quite a bit to be desired.

The third was a government corporation board (turnover approaching $1bil) the woman was selected purely based on, maybe surprisingly, merit and not who was a mate of the shareholding minister. Excellent choice, highly qualified and experienced in her field and one of the best I served with. Interestingly, she refused various offers to be appointed to boards of ASX listed companies as at the time, on the basis that she possibly could be seen simply as the token female appointment and the likelihood of the board being a "boys club". Her day job had exposed her to a few of such boards. She said that many of her (female) peers felt the same which meant that good talent and experience was going to waste.

 

[Garpal Gumnut]

@Country Lad and I have had correspondence on this topic, via chat, over the years. Thanks for starting the thread.

It would pay members well to read these and any further posts by him. He is much more experienced and articulate on this topic than I, or any other "authority" that I have read on Australian Boards.

gg

 

[So_Cynical]

Directors and managers can be incompetent - stating the obvious?

Alan Joyce - 125 million over 15 years, oh please.

 

[farmerge]

Directors and managers can be incompetent - stating the obvious?

Alan Joyce - 125 million over 15 years, oh please.

And on the TV news tonight might be handing back a substantial amount of his ill-gotten gains.

 

[divs4ever]

on the flip-side there are the directors placed by a major share-holder , say the Stokes or Millner family , but there are others , now sure such directors are there to 'babysit their cash investment , but also can be a financial life-line and they can be a good thing ( depending on who is the big investor , they also might be the toehold for a take-over later )

 

[IFocus]

A good story from the mining game was the powerhouse operators for Anaconda Nickel brought very early into FMG shares purely on the merits of Twiggy Forrest who they all knew.

Long story short they all made a pile of money with some retiring.

 

[farmerge]

A good story from the mining game was the powerhouse operators for Anaconda Nickel brought very early into FMG shares purely on the merits of Twiggy Forrest who they all knew.

Long story short they all made a pile of money with some retiring.

So the story goes. The barber who cut Twiggy's hair back in the very early days got the tip from him to put their house into FMG shares. Hopefully they did, as they would have been multi millionaires later.

 

[Value Hunter]

My experience of investing over many years is that the vast majority of company directors and the vast majority of corporate executives are either self serving or incompetent.

I think in large part its to do with incentive caused bias and misaligned incentives more than anything else.

Its why the best performing companies tend to be founder led (or at least run by a large controlling shareholder). Nike is a good example even with a very strong brand in the past when Phil Knight tried to step away from the company it started under-performing and when he came back performance improved greatly. When Steve jobs got kicked out of Apple way back the company lots its mojo and when he came back it got revived. When Howard Schultz tried to step away from Star-Bucks it floundered and when he came back it started performing strongly again. Not that founders or controlling shareholders always succeed but they have a much higher batting average because they are truly incentivized to make it work. In Australia TPG went to the dogs after David Teo stepped away.

In Australia almost all of the best performing companies (long-term) such as Fortescue, Washington H. Soul Pattinson, Ramsay Healthcare, ARB Corporation, Seek, etc have had the common attribute of being led by an founder or other type of owner operator/large shareholder.

Motley Fool has written articles statting that if they were only allowed to use one crtieria to choose which comnpanies to invest in they would not use financial criteria but would rather choose a company run by a founder or large shareholder.

Whereas professional CEOs (and other executives) are essentially taking zero risk (well they are risking other peoples money) and if it all goes pear shaped they will jump ship to another high paying job because they are part of the boys club. And no, free stock options do not count as genuine skin in the game. They essentially are a free lottery ticket.

I agree with Nicholas Nassim Taleb about his whole spiel about skin in the game. A lot of dumb things that directors and CEOs do they would never dream of doing with their own money if they owned 100% of the company but its okay to do dumb stuff with other peoples money.

 

[divs4ever]

My experience of investing over many years is that the vast majority of company directors and the vast majority of corporate executives are either self serving or incompetent.

I think in large part its to do with incentive caused bias and misaligned incentives more than anything else.

Its why the best performing companies tend to be founder led (or at least run by a large controlling shareholder). Nike is a good example even with a very strong brand in the past when Phil Knight tried to step away from the company it started under-performing and when he came back performance improved greatly. When Steve jobs got kicked out of Apple way back the company lots its mojo and when he came back it got revived. When Howard Schultz tried to step away from Star-Bucks it floundered and when he came back it started performing strongly again. Not that founders or controlling shareholders always succeed but they have a much higher batting average because they are truly incentivized to make it work. In Australia TPG went to the dogs after David Teo stepped away.

In Australia almost all of the best performing companies (long-term) such as Fortescue, Washington H. Soul Pattinson, Ramsay Healthcare, ARB Corporation, Seek, etc have had the common attribute of being led by an founder or other type of owner operator/large shareholder.

Motley Fool has written articles statting that if they were only allowed to use one crtieria to choose which comnpanies to invest in they would not use financial criteria but would rather choose a company run by a founder or large shareholder.

Whereas professional CEOs (and other executives) are essentially taking zero risk (well they are risking other peoples money) and if it all goes pear shaped they will jump ship to another high paying job because they are part of the boys club. And no, free stock options do not count as genuine skin in the game. They essentially are a free lottery ticket.

I agree with Nicholas Nassim Taleb about his whole spiel about skin in the game. A lot of dumb things that directors and CEOs do they would never dream of doing with their own money if they owned 100% of the company but its okay to do dumb stuff with other peoples money.

yes i prefer ( real ) skin in the game , not bonus options via a 'long term incentive scheme ' ( although some DO earn those incentives )

also some major shareholders ' buying a seat at the table ' can be helpful ( and sometimes not )

 

[IFocus]

My experience of investing over many years is that the vast majority of company directors and the vast majority of corporate executives are either self serving or incompetent.

I think in large part its to do with incentive caused bias and misaligned incentives more than anything else.

Its why the best performing companies tend to be founder led (or at least run by a large controlling shareholder). Nike is a good example even with a very strong brand in the past when Phil Knight tried to step away from the company it started under-performing and when he came back performance improved greatly. When Steve jobs got kicked out of Apple way back the company lots its mojo and when he came back it got revived. When Howard Schultz tried to step away from Star-Bucks it floundered and when he came back it started performing strongly again. Not that founders or controlling shareholders always succeed but they have a much higher batting average because they are truly incentivized to make it work. In Australia TPG went to the dogs after David Teo stepped away.

In Australia almost all of the best performing companies (long-term) such as Fortescue, Washington H. Soul Pattinson, Ramsay Healthcare, ARB Corporation, Seek, etc have had the common attribute of being led by an founder or other type of owner operator/large shareholder.

Motley Fool has written articles statting that if they were only allowed to use one crtieria to choose which comnpanies to invest in they would not use financial criteria but would rather choose a company run by a founder or large shareholder.

Whereas professional CEOs (and other executives) are essentially taking zero risk (well they are risking other peoples money) and if it all goes pear shaped they will jump ship to another high paying job because they are part of the boys club. And no, free stock options do not count as genuine skin in the game. They essentially are a free lottery ticket.

I agree with Nicholas Nassim Taleb about his whole spiel about skin in the game. A lot of dumb things that directors and CEOs do they would never dream of doing with their own money if they owned 100% of the company but its okay to do dumb stuff with other peoples money.

Absolutely on the money VH seen it 1st hand a number of times.

 

[Smurf1976]

Unfortunately it is still the case that many companies are happy to ignore the KPIs of underperforming CEOs, still give them big bonuses even though the performance is well below par.

Another issue is when high performance is achieved to the long term detriment of the company.

It's not hard to boost short term profits by taking on risk and hollowing out the business but that's pretty much guaranteed to end in tears sometime down the track.

Be very wary of "fixer upper" CEO's who job hop. They come in, seemingly turn the company around then move on before the inevitable. In truth they've turned around the profit yes but not in a manner that's at all sustainable, the wheels are going to come off and probably spectacularly.

Even bigger red flag when they repeatedly move long distances and into completely unrelated industries. Odds are they're doing it because everyone in industry y in city x knows the truth.

 

[Value Hunter]

Another issue is when high performance is achieved to the long term detriment of the company.

It's not hard to boost short term profits by taking on risk and hollowing out the business but that's pretty much guaranteed to end in tears sometime down the track.

Be very wary of "fixer upper" CEO's who job hop. They come in, seemingly turn the company around then move on before the inevitable. In truth they've turned around the profit yes but not in a manner that's at all sustainable, the wheels are going to come off and probably spectacularly.

Even bigger red flag when they repeatedly move long distances and into completely unrelated industries. Odds are they're doing it because everyone in industry y in city x knows the truth.

What you are saying is entirely true and also intertwines with my point. If it was their own company they (unless they are dressing the company up for sale) wouldn't try to paper over the cracks and eject with their golden parachute before it all implodes.
Charlie Munger harps on incessantly about incentive caused bias for a reason.

I would like to add the close corrollary to that of "follow the money trail" which together explain everything from fake mainstream COVID vaccine "science", to the green energy scam, to the modern education system to feminism, to the modern industrial diet and dietary recommendations and almost every other evil we endure in modern society. Anything in society that occurs which is either evil or seemingly illogical or irrational or to the detriment of society the first question to ask is always "who profits from this?" and then you will have the answer to why it is the way it is.

 

[divs4ever]

also another factor that often worries me ( but not in every case ) is directors holding seats on multiple boards ( and not just ASX-listed ones ) some are sitting on four , five , six ( or more ) currently , now sure if the director holds 10% ( plus ) of the company he/she will be laser-focused , but some others with minimal cash exposure .

 

[farmerge]

also another factor that often worries me ( but not in every case ) is directors holding seats on multiple boards ( and not just ASX-listed ones ) some are sitting on four , five , six ( or more ) currently , now sure if the director holds 10% ( plus ) of the company he/she will be laser-focused , but some others with minimal cash exposure .

Soft income for sone, perhaps

 

[Warr87]

also another factor that often worries me ( but not in every case ) is directors holding seats on multiple boards ( and not just ASX-listed ones ) some are sitting on four , five , six ( or more ) currently , now sure if the director holds 10% ( plus ) of the company he/she will be laser-focused , but some others with minimal cash exposure .

Your obligation is to the owners (share holders). having your own shares in the company could bring a conflict where there may be a decision that could benefit you instead of the whole (or at least the majority). I would argue its better to have ppl who do not have a stake in the company to be as detatched and objective as possible.

Soft income for sone, perhaps

A lot of boards do not pay, or if they do, its nominal. ASX listed companies, particularly those in the top, would pay. otherwise its reimbursement of costs or a few hundred per monthly meeting.