Corporate Governance

Shareholder Access and Shareholder Value: The Benefit of Dissident Directors on the Board (Part 2)

By J. Robert Brown

We are discussing recent data on the value of dissident directors on the board.  There have been plenty of studies done on the value of "independent" directors on the board but as we have noted, these directors are legally independent but often not independent in fact.  The only way to truly ensure that directors are independent of management is to elect directors not nominated by management.  This occurs, for example, where shareholders submit nominees and they are elected to the board.

The Investor Responsibility Research Center Institute has done a study of 120 so called "hybrid" boards.  These are boards where dissident shareholders succeed in electing a short slate of directors.  Thus, the boards typically include officers of the company (the CEO, at least), so called "independent" directors, and directors nominated by shareholders.   The study was made possible by the fact that these types of boards have become more common and, frankly, more successful.  According to the report, dissidents succeeded in gaining representation in 75% of the companies targeted.  Success came mostly through settlements rather than completed proxy contests.  

According to the press release (the entire report can be found here), these "hybrid" boards generate a noticeable increase in shareholder values. 

• Shareholder value on average at ongoing companies improved under hybrid boards by 19.1% – 16.6 percentage points more than peers – from the contest period through the board's one year anniversary. More than half of that gain came during the three-month contest period: average share prices increased by 5.0% over the ensuing year, which is 3.6 percentage points better than peers.

• Strong positive share price performance over the 15 months from the contest period through thehybrid board's first anniversary was increasingly likely when the dissidents owned a significant percentage of shares. When dissidents owned between 10% and 25% of shares, performance significantly outperformed peers by an average of 67.7 percentage points. In comparison, dissidents that held less than 5% of shares performed in-line with peers, and dissidents that held 5% to 10% of shares moderately outperformed peers.

• Among the ongoing businesses evaluated following the creation of hybrid boards, total share price performance for the 39 months from the three month contest period through the three year anniversary of the hybrid board, averaged 21.5% – 17.8 percentage points higher than peers – largely on significant contest period price appreciation averaging 10.1%. Over the 36-month period after the contest period, however, share price performance, averaged 0.7% or 6.6 percentage points worse than peers. 

This does not mean that every "hybrid" board is successful.  Nor does it mean that all non-hybrid boards are a failure.  But it does show that when the board consists of a minority of directors nominated by shareholders, the board's attention seems more focused on the interests of shareholders, at least to the extent this is measured by return.

The interesting follow up would be to examine the impact of these "hybrid" boards on executive compensation.  It would be quite interesting to see if the presence of dissident directors results in less excessive compensation practices.

Full post as published by The Race to the Bottom on June 10, 2009 (boomark / email).