BANKING AND FINANCIAL SERVICES GRAPPLE WITH CHALLENGE OF DOWNSIZING THE BOARD AND EMBRACING DIVERSITY

New research from global law firm Eversheds shows that boards in banking and finance companies have shrunk by 13.6% in the last five years. However, they remain larger and less diverse than those in other industries – largely due to the regulatory environment in which these organisations are operating.

A new report, the ‘Eversheds Board Report: The Effective Board’ brings together analysis of the share price performance in more than 500 top companies in Europe, the US, Asia-Pacific, the Middle East and Brazil between 2011 and 2012 with in-depth interviews with 85 senior board members from around the world. It follows the first Eversheds Board Report published in 2011, the first study to compare board composition and share price performance with research going back to 2007.

This new report highlights global trends in board composition over the past five years, particularly a trend towards smaller boards, with this development consistently related to better company share price performance across international regions and industry sectors.

Nearly all board directors (93%) interviewed for the report believe that an effective board should have less than 12 members. Within the banking and financial services sector, companies based in the UK have the smallest boards, with an average of 11.6 members, but this rises to 13.8 in the United States and 15.4 in the rest of Europe.

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As well as the trend towards a leaner board, the study found that diversity in experience around the boardroom table has a positive impact on share price performance. This presents a unique challenge for businesses in the banking and financial services sector, due to the stringent qualification requirements for prospective board members.

Despite this link between diversity of sector experience and better performance, the trend has been to recruit NEDs with same industry sector experience in every region except Hong Kong. This is most evident in the banking and financial services sector, where 45% of NEDs have sector expertise – up 85% since the first report in 2007.

However, closer analysis of the tenure of board directors in the sector shows that this expertise is only valued when it delivers for the business. Board directors in banking and financial services companies are more likely stay in their role when the company performs well – the analysis as a whole showed longer-serving directors were more likely in companies with better share price performance.

The issue of gender diversity in the boardroom was also investigated in the global study, and the findings highlight that in the last five years, there has been a 50% increase in the percentage of female directors on boards in the banking and financial services sector – consistent with the average for all regions and sectors. That said, across the board this increase is against the context of a low base and the appointments of women are mostly of a non-executive, rather than executive, nature.

Commenting on the findings, Paul Worth, partner and head of the financial institutions sector at global law firm Eversheds, said:
“Since the first Eversheds Board Report was published in 2011, increased media attention and challenging economic conditions have meant that boards have been subject to greater scrutiny. None more so than those in the banking and financial services sector.

“It is evident that the financial crisis has triggered substantial reform in the boardrooms of banking and financial services companies. We are seeing a trend towards leaner boards, but it remains difficult for this sector to embrace the diversity in experience due the complex regulatory environment.

“Given the turbulence of recent years, coupled with the introduction of more stringent regulation in the sector, it is not surprising to see this reliance on sector experience within the boardroom. However, directors who do not deliver for the business are likely to be cut loose, with the report showing a direct correlation between length of tenure and business performance.

“Looking ahead, it is going to be a challenge for the sector to strike the right balance in achieving strategic growth against a myriad of risk factors and tougher regulation.”

To request a copy of ‘Eversheds Board Report: The Effective Board’, please visit: http://bit.ly/YZtn6n

 

 

 

 

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