By Kimberly Gladman, CFA, Ph.D., Director of Research and Risk Analytics
GMI Ratings seeks to analyze board quality based on publicly available information—principally proxy disclosures about directors’ qualifications, biographies, and their relationships to the company and each other. But, skeptics often note, board discussions happen behind closed doors—can proxies really provide a window into their dynamics?
The answer is apparently “yes,” according to a recent study conducted by Solange Charas, a management consultant and former public company director now pursuing a Ph.D. at Case Western Reserve. Charas used GMI scores to screen small and mid-size (SME) organizations. She then interviewed twelve directors from high-rated and eleven directors from low-governance rated firms about boardroom dynamics and organizational culture. Although the scale of her study is small, the results provide intriguing validation of our approach to board analytics.
Across the sample, directors said they tended to behave formally and avoid conflict in the boardroom, while expressing disagreement and actually “getting the work done” in committee meetings and other, less structured venues. But there seemed to be striking differences in the ability of high-rated and low-rated firms to disagree while remaining a cohesive team. The poorly-rated firms lost 25% of their directors annually (compared to an average of 19% for S&P Smallcaps) while the well-rated firms averaged only 14% turnover. Moreover, the high-rated firms were much more likely to have found their directors through external searches, rather than through personal connections to existing board members or company executives (only 25% of board members at the well-rated firms told Charas they originally came to the board through a personal connection, vs. 63% of the directors at poorly-rated firms). Most striking of all, the high-rated firms outperformed the low-rated ones in several measures of profitability and value creation.
In the coming weeks, Charas will share with readers of our blog some possible explanations for these findings, as well as a few additional insights from a longer version of this study. In the meanwhile, for more information about the research, contact Charas at email@example.com.