May 17, 2016
The Morning Risk Report: Longer Board Tenure Linked to Higher Returns, Study Says
Corporate governance experts are making much of board refreshment of late, but a rush to get new blood on boards could actually hurt shareholder returns and company values, according to a recent study. Researchers at investment management firm QMA, which has around $110 billion under management and is part of Prudential Financial, found that longer board tenure has a positive relationship to stock returns as well as current and future firm value. In fact, the study found that an investment strategy consisting of buying stocks of companies with boards with more than 12 years of average tenure and selling stocks of companies with board tenure shorter than two years earns, on average, “statistically significant abnormal returns of 0.31% per month.” Gavin Smith, vice president of QMA said: “This prevailing view that long-tenured boards are bad…isn’t backed up by the data.” The study of 3,000 companies spanning an 18-year period assumed the board’s role to consist of monitoring management, advising management on specific technologies or processes relevant to the firm and advising on general business issues. By using forward-looking stock prices and next-period market-to-book values, the researchers addressed issues of causality that have hounded previous studies of this kind. As an asset manager using quantitative models for investment decisions, QMA is increasingly using measures that fall under “the quality umbrella” to evaluate performance thanks to the growing availability of non-financial quantitative data, such as environmental, social and governance factors, said Mr. Smith. But in line with previous findings, QMA also concluded that there seems to be a deterioration in the quality of a board member’s contribution after about nine years of service as they may become too cozy and less up-to-date on technological advances, and that is reflected in a company’s value. This decline is particularly pronounced at companies in the high-growth industries, according to the study.
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