Firms fall short on corporate practice

Two-thirds of top Irish public companies fell short on at least one aspect of best practice on corporate governance last year, according to a new analysis from Goodbody Stockbrokers.

The study, which is contained in Goodbody's 2004 Irish Equity Yearbook, finds that, while the majority of the top 30 listed firms in the State were in compliance with the UK/Ireland Code of Practice on corporate governance, a number still had room for improvement. Some 66 per cent of the companies, for example, had boards where less than half of the members were truly independent, according to their 2002 annual reports.

One-fifth did not have a formal and transparent procedure for the appointment of new directors and about a third did not identify their "senior independent director" in their annual reports.

One-third, furthermore, continued to combine the roles of chief executive and chairman, despite the code indicating that there should be "a clear division between the two". Goodbody noted that good progress had been made in this regard, however, with a number of companies splitting the two roles over the past couple of years, and firms such as Kingspan indicating their intention to do so.

Independent directors are of more concern to the broker, which points out that although most leading firms have at least equal numbers of executive and non-executive directors, the independence of many of the latter "does not stand up to scrutiny".

Independence tends to falter, according to the analysis, on issues such as length of service, previous executive relationships with the company or familial ties.

"These issues particularly apply to companies such as CRH, Anglo Irish, Elan and Independent of the top-tier companies, as well as Grafton, DCC, Jurys and Kingspan in the next tier."

Goodbody has also concluded that boards tend to bear little correlation to the size of a given company. The broker has calculated, on the basis of prevailing market theory, that "optimal board size" runs between seven and 15 members, with the number rising as companies get bigger or have more stakeholders.

At the moment, 22 out of the top 30 firms fit within these "optimal" criteria. Three (Galen, Viridian and Trinity Biotech) have what Goodbody would consider to be too small a board, while five (Irish Life & Permanent, Independent News & Media, Kerry, Glanbia and Waterford Wedgwood) are "overstaffed", according to the study.

The broker also looks at directors' fees, noting that "there does seem to be a general trend, naturally, for the larger companies to spend more on their non-executive board members".

In an effort to measure the relative responsibility placed on a board in its governance duties, Goodbody compared directors' fees to company profits.

Among those with "an overly expensive board", according to the analysis, were Independent News & Media and Waterford Wedgwood.