Watching the Directors

The directors you hire to oversee the companies you invest in have been asking for more money of late, but how can you tell if they deserve it? Perhaps more importantly, what should an investor look for in a board as part of judging whether a company might be worthy of investment?

Some of the top institutional investors we’ve interviewed for Eureka Report have mentioned the calibre of the board as one of the factors they examine when running their measuring tape over a company. It’s a lot easier for the big professionals to do that than it is for retail investors. The big players, with billions of dollars at their disposal, are courted by the companies with chairmen of the board often calling on them '” something they don’t tend to do for individuals whose funds under management are measured with fewer zeros.

There’s also a lack of ready information from the investor’s point of view about just what to look for in a board. Whole forests are felled in the wake of every major corporate collapse to provide the paper for the debate about what directors themselves should be thinking and doing to fulfill their duties. But the investor only gets an occasional look in from a negative perspective. Most reports seem to dwell on what directors should do to avoid bankruptcy.

So we sought out an expert in the field for his informed opinion. Bill Beerworth, managing director of corporate advisers Beerworth Partners, has rich experience as a government and private sector lawyer, investment banker, chairman and non-executive director. He was a member of the committee of Financial System Inquiry '” better known as the Wallis Inquiry '” and thus carries some responsibility for the very structure of our financial system.

As you can see in our video interview with Bill Beerworth or read in the extended transcript of the full discussion in Wednesday’s edition, there are ways for the astute investor to read between the lines to suss out whether their directors are worth their fees.

One suggestion from Bill Beerworth is to use annual general meetings to really put directors under the microscope on their involvement and knowledge. "Look in the white's of their eyes," he suggests: It’s an opportunity too often wasted in recent years."
He also suggests you need to read both the financial press and company reports thoroughly to keep up to date with your investments. As Beerworth maintains, once an investor knows the questions to ask, then they can really demand answers from board members at AGMs and other company gatherings.

Beerworth has become a thoughtful commentator on corporate governance issues, often with a view that is at odds with the fad of the day. For example, you can read his opinion on corporate social responsibility here.

He believes the post-HIH Insurance corporate governance crusade may have gone too far in what it demands of boards without helping investors. As usual, it now comes down to investors helping themselves by seeking boards that offer genuine communication rather than the usual glossy public relations spin and directors prepared to be closely involved in the company’s strategy.