“Directors' networks”: bad for Kiwi companies?

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A new study by AUT has suggested that the “director’s networks” trend could be affecting organisations negatively by hindering performance.

The study, conducted by a student from AUT’s School of Business, showed that a high level of these networks – in which directors sit on more than one board and share information – affected business performance.

Associate Professor Aaron Gilbert, from the AUT School of Business, told The New Zealand Herald that in Australia, the average director sat on just one board per year.

“[The student] chose Australia because there was much better access to data than in New Zealand, and she based the study on the years 2001 to 2011,” he said. “She looked at which directors were sitting on what boards and who was linked up, covering between 700 and 1100 organisations”.

It was found that some directors sat on two boards, while the most multi-room director sat in on up to thirteen.

Companies whose directors had stronger boardroom network links were linked to poorer performance in various measures which included return on assets and total stock return.

Although the research did not analyse reasons for the correlation, Gilbert speculated that excessive information could potentially be accountable, pointing out that many theories suggest that “it is a lot harder to process information when you have a lot of different experiences you are trying to discuss”.

He added that bad information can be passed between boardrooms.

“So you have a director who sits on the board of company X, a telecommunications firm, and company Y, an energy company,” he told the Herald. “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 also told reporters that although there is no direct evidence of New Zealand boardrooms being more “linked up” than Australia’s, he has reason to believe that this is the case.

“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,” he said, aligning this with New Zealand’s smaller pool of directors.

"[The research] shows that it may not be the best thing to have this communication between directors,” Gilbert added. “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.”

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