Media: Business, Financial and Travel and Leisure Trade Media
Date: 23 October 2007
The new study of board composition and attitude to good governance among JSE-listed companies, Board Barometer, today released its analysis of the Travel and Leisure sector of the JSE. The results show a mixed performance, with the best companies scoring 7.22 (out of 10) and the worst 3.32. More significantly, the research demonstrates a strong link between good governance practices and strong financial performance – bearing in mind that the size and variability of the sector means that some companies perform very well financially without being the most efficient and effective about their boards.
Board Barometer seeks to analyse from available information whether companies’ boards on the one hand are composed in such a way that allow them to perform, and then uses signals from published data to signal the board’s intent or attitude toward performing its prescribed role in terms of JSE rules, the King Codes, existing legislation and other variables deemed important in the South African context. The tool will be valuable both to boards that want to improve their composition, and to analysts and fund managers who want an easy to read analysis of board construction and attitude and the risks associated with non performance
In terms of the analysis of board composition, the study comprises an overall score from scores for expertise, role diversity, experience and demographic diversity. The sector achieved an overall score of a fairly average 5.70 here. In terms of sub-sectors, Gaming scored highest with 6.19, followed by Hotels and Travel with 5.97, and then Restaurants with 4.97.
As far as board expertise is concerned, the overall sector score of 7.82, while high, was negatively affected by the Gaming and Restaurant sub-sectors claiming no HR or IR expertise on their boards – a fairly serious weakness in service-driven industries.
Role diversity on the sector’s boards was not good. 83% of companies analysed had no independent chairperson, and the score for independent vs. non-independent directors was also low at 3.96. The exception to this rule was Sun International, who scored a perfect 10.00 on this ratio, and a very high 9.33 on role diversity.
The measurement of board experience comprises such factors as continuity, executive experience, number of boards on which directors serve, and so on. Here the sector scored well at 6.26 overall, with Gaming once more being the highest scoring sub-sector at 7.00.
Demographic diversity refers to racial, gender and age diversity on the board. Here the sector has catching up to do, with a score of 4.32, with the Restaurant sub-sector scoring 0 for gender and racial diversity! One wonders, do women not eat out any more?
Board Barometer also measures the attitude of boards towards corporate governance, based on scores for BEE and transformation, board sub-committees, and reporting levels. Overall the sector scored a moderately low 5.69 on these factors.
For BEE and transformation the sector achieved 4.78. For board sub-committees, the score was 6.13, with audit committees scoring highest at 8.75, and nominations committees lowest at 4.17. Overall Sun International was again the best performing company, with a rating of 9.49. In terms of reporting, the sector overall scored moderately at 6.21, led by the Gaming sub-sector. Areas of concern in the reporting arena are for the impact of companies on their surrounding communities and on the environment, at 3.61 and 3.33 respectively. Sun International, it is worth pointing out, scored a perfect 10.00 for all reporting areas.
The wide variation between top scoring company Sun International, at 7.22 overall, and King Consolidated, the lowest scoring at 3.32, once again demonstrates that the usual measures of a company’s business and financial performance need to be placed in context. A share might be high risk because it has relatively less evidence of good governance – but might offer high returns as a highly profitable business with a great PE ratio. In turn, a company performing well in a sector that is relatively well-legislated and organized, such as the Gaming sector, might represent consistently better returns at lower risk levels in the longer term. Proper analysis will take such factors into account.