Analyze a company’s board before investing

A company’s board of directors affects not only the way the business is run, but also its stock value.

Just last week, a study revealed companies with one or more women on their boards have better corporate governance. The study by Judith Zaichkowsky, professor of marketing at the Beedie School of Business, Simon Fraser University, also found even one woman can make a difference.

“The data showed a statistically significant difference in corporate governance scores between zero women and one; no difference, between one and two; and a significantly higher score for companies with three or more women,” notes Zaichkowsky.

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Still, companies with the most women scored the highest on corporate governance, especially in male-dominated industries, such as energy and mining. Other industries that were surveyed include consumer, financial services, healthcare, industrials, technology, telecom and utilities.

But how important is corporate governance and a company’s board of directors when analyzing its stock?

It’s a metric Andrea Horan, portfolio manager at Agilith Capital Inc., looks at as part of her investment strategy.

“Bad governance is a good reason to avoid investing in a stock because if the board isn’t advocating for the shareholders, no one is,” says Horan. “This may not impact the stock’s valuation on a day-to-day basis, but at critical points (like a takeover offer or a needed change in management) a bad board can let shareholders down, acting in management’s interest.”

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She adds when there is more than one shareholder unfriendly structure (e.g. multiple voting shares controlled by a single entity, shareholder rights plans that discourage expressions of interest, or highly lucrative executive severance plans) the stock is more likely to trade at a permanent discount to its peers.

Steve Barban, principal and senior financial advisor at Gentry Capital, Manulife Securities Inc., also considers a company’s board in his qualitative analysis. “Without proper governance, investors are at the whim of the shareholders.”

For instance, he notes Google’s “odd stock split was essentially hatched to ensure the two co-founders retain voting control going forward, regardless of any dilution of shares used to make future acquisitions,” and this isn’t ideal for shareholders.

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Fact

The number of women on a board has consistently risen over the last decade. In Canada, women represented 7.6% of a board in 2004; 8.4% in 2009; and 10.8% in 2012.

Source: Zaichkowsky, J.L. (2014), Women in the boardroom: one can make a difference

While he doesn’t necessarily avoid these types of companies, he does give them a low corporate governance grade.

And when it comes to companies with women on the board, he supports it, saying it would be illogical not to. “[Women] represent slightly more than 50% of the western population so to exclude that element from the selection pool for directorships, we would be removing 50% of the available brain power that is out there.”

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Meanwhile, Fiona Wilson, portfolio manager, Global Equities at Guardian Capital, doesn’t necessarily look at a board’s composition.

“That being said, one of the factors in the model is sentiment data, so if there was a major board issue that ‎effected sentiment, that would come up in the model,” she says.