Board QualityHow important is it to have related industry experience on the board?

Webinar #1: the importance of related industry Experience (introduction) » (aPaC Webinar on 29 September 2016)

Webinar #2: the importance of related industry Experience in Financial Services » (Europe Webinar on 3 November 2016)

Webinar #3: the importance of related industry Experience in the Mining Sector » (North america Webinar on 9 November 2016 - forthcoming)

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Yannick is ESG Financial Analyst at Société Générale CIB. He joined the company in 2007, following a successful career at BNP Paribas Asset Management where he worked as both a buy-side ESG & financial analyst and Product Specialist, focusing on Institutional Marketing and Business Development. Yannick holds an MBA from the Paris Garduate School of Management (ESG), and completed an executive training in Corporate Finance at INSEAD.

Ed is Executive Manager, Governance, Engagement & Policy at ACSI. He has been with ACSI since 2008 and is responsible for policy, proxy voting research and engagement with Australia’s largest listed companies. He has extensive experience engaging with directors of ASX200 companies on a range of ESG issues, and an insight into the reporting practices of Australia’s largest listed companies. Ed is a lawyer with a diploma in financial services and is completing a Masters in Commercial Law.

Karin is Senior Manager, Corporate Governance at Australia’s leading sustainable investor, AMP Capital. Since being appointed to this role in early 2000, Karin has been responsible for AMP Capital’s proxy voting and engagement with companies in relation to the way they are governed on behalf of shareholders. Prior to taking on the governance role Karin spent over 10 years in a range of portfolio management and investment specialist roles at AMP. Karin holds a Bachelor’s Degree in Business (Accounting), a Graduate Diploma in Applied Finance and is a recent graduate of the Australian Institute of Company Directors’ Directors Program.

Johan is Senior Equity Analyst Global Financials at Robeco. He believes in taking a fundamental, long-term approach to investing, which includes deep-dive company analysis, in-depth (corporate) governance analysis and executive management and board assessment. He has built up over 15 years of industry experience in buy and sell-side equity research with a focus on banks, insurers and diversified financials. Johan holds various degrees in Finance, Economics and Business and Economic History from the HES School of Economics and Business (Amsterdam), the University of Amsterdam and Uppsala University in Sweden.

Karin Halliday

yannick ouaknine

Ed John

Johan van der lugt

Webinar #1: the importance of related industry Experience (introduction)

Webinar #2: the importance of related industry Experience in Financial Services

Speakers

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Johan van der lugt (1/2)Senior Equity analyst Global Financials at robeco

Briefly describe how you evaluate Corporate Governance at robecoCorporate governance is very important for us throughout the entire investment process. Through corporate governance we get insight into the quality of management. Having a high-quality board that is fit for purpose is essential, there are no shortcuts.

We typically look for undervalued companies that can improve their governance and get re-rated. ESG data providers can help in all stages of the process especially when used in conjunction with other resources, such as our Governance and Active Ownership team and the Sustainability Research analysts.

One of the first thing we do is screen for bad apples. After that, we identify areas for improvement in corporate governance that is linked to financial materiality and value creation. One of the most important steps is to engage the company in a dialogue. This is essential to properly assessing management and board quality.

We take a multifaceted approach to board quality, looking at the structure and procedures, behavior and performance. How strong, independent and diverse is the board? Were there business ethics or governance incidents in the past? How does the company perform relative to its peers in terms of profitability, sustainability and volatility?

It is essential to understand the board’s agenda, especially in relation to the materiality matrix, so you can map events in terms of their impact on the firm and relevance to stakeholders. We want to understand how much time and energy is spent by the board on making sure the company is prepared for the future and whether it will be ready to grasp any opportunities.

What are the challenges boards face in the banking sectors?On a positive note, we’ve seen the level of financial expertise of non-executive directors increase since the financial crisis. According to data from Nestor, the average number of non-executive directors who have a background in the financial industry rose from 29% in 2007 to 40% in 2014.

We are also witnessing a trend of regulatory bodies coming to

the fore in terms of pre-approving new directors. Bank boards are required to adopt a more hands-on approach as they are closely scrutinized by supervisors. Looking at some examples in Western Europe it seems to us that a lot of emphasis is given to risk management experience and financial sector expertise. Relevant commercial experience outside the sector - think of IT including cybersecurity, customer interaction/ marketing - seems to be discounted. This is a concern for us.

The question perhaps is: Do we expect too much from company boards? Can they be on top of the organization and is it reasonable to expect this?

The increase in regulation and compliance has resulted in an increase in directors’ workload. In the US, there is an increasing trend towards “professional” board members. This could result in boards taking less of a challenging position in the organization, particularly in the context of the CEO-chairman singularity. That is NOT something we would like to see.

do you think the extent of board renewal is on par with the degree of change that investors are expecting to see within the banking sector?Taking a longer term view, we would like to see more technology experience on the board of banks. The banking sector has to reinvent itself as we witness an ever increasing amount of complexity in the sector, from regulation and technological disruption to changing client demands.

Last year, a study by Accenture showed that only 6% of the directors overseeing the world’s biggest banks have any technology experience. Almost half of the world’s biggest banks have no board members with any technology experience. This is a concern.

On a positive note, we’ve seen about 11% of banks setting up technology committees on their boards. We would like to see this number go up. Basically, what we want to see is that boards acquire the skills they need to think about, and understand, disruptive technologies. Instead we are seeing boards of financial services firms getting older and staler. This does not bode well for an industry that is in a phase of transformation.

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Johan van der lugt (2/2)Senior Equity analyst Global Financials at robeco

Another risk we’ve identified is that there is not always a strong enough forward-looking agenda. A study by McKinsey found that directors typically spend 70% of their time on quarterly reports, audit reviews, budgets and compliance rather than on future of the company.

As an investor we would like to understand the extent to which the board is challenging the management team. The emphasis should be on making sure the company is prepared for future events. This can be both be a risk and an opportunity.

Linked to this issue is the board’s self-assessment and the information that is provided to stakeholders. Together with the nomination committee’s disclosures, investors are able to form an opinion on what is required of the board in terms of its skill set and whether the current board members meet them. More work is needed in this regard.