Non-execs have key role in boosting share price

Feb 15 2007 by Nic Paton Print This Article

British companies that repeatedly breach the City's combined code on corporate governance and who's boards are populated solely by executive rather than non-executive directors, are much more likely to see their share price fall as a result.

A study by the Association of British Insurers has found a strong link between governance standards and share price performance.

It studied the share price performance of companies that had been issued with two or more "red tops", or the most serious corporate governance breaches, over the past three years.

Alongside this, it also looked at the composition of those company's boards.

Of the 14 company's in the FTSE All-Share index issued with more than one red top, 11 had underperformed in their sector.

Nine of them had no independent non-executive directors and three had only one. One of the 14 had three independent directors and one had no independent directors in 2005 but five by 2006.

The combined code recommends that, for companies in the FTSE 350, half the members of their board, including the chairman, should be independent non-executive directors.

Outside the 350 index, companies are expected to have at least two independent directors on their board.

Most the of 14 in the sample were outside the FTSE 350 and so were required to have at least two independent directors, but 12 did not, the ABI added.

ABI director of investment affairs Peter Montagnon said: "Red-tops related to the combined code are rare, and indicate a serious breach of best practice.

"Our study points to a strong link between governance standards and share price performance. It shows that a persistent imbalance in board composition tends to go hand-in-hand with a reduced ability to create value," he added.