Directors' networks can harm company performance

Bachelor of Business honours student Angela Andersen measured companies with such boardroom network links and found a connection between those links and poorer performance. Photo / Thinkstock

New Zealand companies may be affected negatively by the phenomenon of "directors' networks" - where information-sharing can hamper business performance, according to a new AUT study.

Associate Professor Aaron Gilbert, from the AUT School of Business, says a recent study of directors in Australia by Bachelor of Business honours student Angela Andersen showed a high level of director networks (directors sitting on more than one board and sharing information) affected financial performance.

"She chose Australia because there was much better access to data than in New Zealand and she based the study on the years 2001-2011," says Gilbert. "She looked at which directors were sitting on what boards and who was linked up - she covered between 700-1100 firms".

In Australia, she found on average that most directors sat on only one board a year. Some sat on two, with the most multi-boardroom director being one who sat on "12 or 13" boards a year.

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She then measured those companies with strong boardroom network links and found a connection between those links and poorer performance - using various measures, including return on assets and total stock return.

The research did not delve into reasons for the outcome but Gilbert says some theories pointed to the fact that there was a lot more information coursing round the business world "and it is a lot harder to process information when you have a lot of different experiences you are trying to discuss."

He says "group thinking" also appears to become more prevalent; directors were as prone as anyone to believing they may have come across "the next big thing". In addition, bad information can also be passed between directorships.

"So you have a director who sits on the board of company X, a telecommunications firm, and company Y, an energy company. Meanwhile, another director sits on company Z, an airline, and company Y - so company Z has that link with X and Y and their thinking."

Gilbert says he has no direct evidence that New Zealand boardrooms are more "linked up" than Australian ones.

"But, anecdotally, my understanding is that New Zealand will have a bit more of this going on than in Australia, with a few more directors sitting on more than one board."

That is, he says, because New Zealand has a smaller pool of directors, encouraging more cross-membership.

Andersen's study - which took eight months - earned her an honours degree and set her on course for a Doctor of Philosophy, which she is currently working on at AUT. Her topic is how iwi run their finances and how they manage their investments in the short- and long-term.

Gilbert says her previous study is being peer reviewed and subject to feedback before finding a wider audience and adds it has significance for the New Zealand financial community.

"It shows that it may not be the best thing to have this communication between directors. It shows that this can affect performance of the companies involved and always raises the possibilities of a breach of independence.

"Those who sit on boards and have mutual relationships can find it may undermine corporate governance requirements. It also certainly suggests that the idea of connectivity between boards doesn't seem to be helping firms whereas those who have experienced directors who sit on one board and who understand their industry do better."

* This story is part of a content partnership with AUT