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NaTiONaL DiRECTORSiNSTiTUTE NDi Executive Exchange

NDIBoardroom Report: The Correlation Between Governance Practices and Stock Price Roundtable

Thursday, January 13, 201112:45 p.m. – 2:15 p.m.

www.eversheds.com

This information pack is intended as a guide only. Whilst the information it contains is believed to be correct, it is not a substitute for appropriate legal advice. Eversheds LLP can take no responsibility for actions taken based on the information contained in this pack. © EVERSHEDS LLP 2010. Eversheds LLP is a limited liability partnership.

The Eversheds Board Report

Executive Summary

Robin Johnson, Eversheds LLP13 January 2011

©2011 Foley & Lardner LLP

The launch

■ The Eversheds Board Report will be launched at the end of January but if you would like a copy please let any of the following know– Steve Barth ([email protected])– Todd Pfister ([email protected]); or – Robin Johnson ([email protected])

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Outline

■ The Report investigates whether board composition had any relationship to the company’s ability to weather the financial crisis.

■ The Report examines the mechanics for effective board performance primarily in Europe.


Outline continued

■ The research investigated the relationship between board performance and company performance through empirical analysis of board composition and share price performance of 241 companies over two time points 2007 and 2009.

■ The empirical analysis was then complemented with interviews from a large number of directors who were chosen at random from 241 companies analysed in the quantative research.

■ Eversheds commissioned a research company RSG Consulting to conduct the research.

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Key highlights

■ The global economic downturn was a financial crisis not a corporate one though two thirds of companies share price went down during the period.

■ Continental European companies suffered the biggest drop whereas the UK FTSE 250 experienced a slight increase.


Sectors

■ The best sectors in terms of share price performance were computers technology and software and not surprisingly the worst performance were in the financial sector.

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Percentages

■ In the two-year period 2007-2009, 20% of CEOs were replaced and 23% of chairman.


Board compensation

■ Board compensation dropped by an average of 22% over the period though pharmaceuticals computers technology and software sectors reported an increase in compensation.

■ Total board compensation for financial institutions dropped from $23.2m to $15.7m.

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Board composition

■ There was a slight increase in the number of independent directors and even more increase in the number of women. There was also an increase in directors with "relevant industry experience".


Quote

"Boards will never get it right all the time. All we can do is put together a mechanism, an organisation and set of processes which have a fair chance of getting it right. We do not know the future, we only know the past and therefore we have to make judgements about the future and sometimes get it wrong."

John Whybrow, Chairman, Wolseley plc

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Overall

■ Overall the research showed that boards that were smaller generally performed better. Explanations given were greater focus on issues, better management from the chair, quicker decision making and better overall dynamics between board members.


Relevant institutional shareholders

■ There was a general view that institutional shareholders were becoming more engaged and exerting more influence on company boards. A significant majority of directors (over 80%) felt this was not in the long term interest of either institutions or companies and shareholders should stay as shareholders and boards should stay as boards.

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Percentages

■ 64% of directors felt the board represented shareholders rather than stakeholders at large. 63% of directors felt the board was both a minder and strategist. There was however a big disagreement as to what the correct balance was.

■ 93% of directors believed the board should be involved in risk management but again this was little consensus as to what risk was. There was a strong disagreement between division on risk responsibilities within independent and executive directors.


Quote

"Boards are not just about selecting the best people and putting them around a board and assuming it is going to work brilliantly. Boards work brilliantly because of the relationships that are established around the table and because of a degree of mutual respect. A lot of that comes down to behaviour."

Anthony Fry, Chairman, Dairy Crest Group plc

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Directors

■ Directors were split as to whether there was enough competency on board of directors.

■ Continental European directors felt there was less competence on boards whereas directors of UK companies felt the UK made a significant move towards professionalism.


Directors continued

■ Companies whose directors served longer on a board and particularly in their existing positions generally faired better over the financial crisis.

■ Though when interviewed 75% of directors felt the length of tenure was not an indicator of usefulness or effectiveness of individual directors.

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Training

■ There was a general view that directors’effectiveness would be enhanced by training. This would not just include compliance but also cover aspects like financials, governance, PR, social media and relationship with shareholders.


Chief Executive

■ Significantly having an existing chief executive of another company on the board appeared to be a significant asset. It was felt that someone who was an existing chief executive was more useful than someone who was past chief executive but at the same time it was shown the board was so-called busy directors, ie those directors that held a number of external appointments had a negative relationship to perform to share price performance.

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External appointments

■ Directors at top performing companies had few external appointments than those at bottom performing companies.


What makes an effective Board?

■ When asked what made an effective board the most common answer was getting the composition right, ie the right balance of personalities, abilities and experience.– 75% of people interviewed felt this was the

case.– 50% felt an effective chairman was

essential.– 41% said there should be appropriate

challenges to an executive team.

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Financial Crisis

■ The general view was that the financial crisis did not change the role of a director. However, the vast majority agreed that the role of an independent director was now more intense as independent directors had spent more time looking at financials and gaining a thorough understanding of the business.


Top 10 challenges

■ The top 10 challenges in descending order were:1. the economic climate on a general basis;2. ensuring that executives managed the company;3. too much regulation;4. focusing on strategy and resisting short term market

pressures;5. appointing the right management and getting the board

team right;6. directors proving value;7. succession planning;8. striking the right balance with regulators;9. learning lessons from crisis;10. international expansion and emerging markets.

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