Editors' Pick: Originally published Dec. 28.
Who's overseeing the companies you invest in? Do they have a top-notch board of directors, actively engaged with the company? Or is the boardroom stocked with a bunch of yes-men and yes-women fawning over the CEO?
Board service is getting increasingly demanding, with directors of companies in the S&P 500 now sitting on an average of a little more than two public company boards, according to an executive database maintained by research firm BoardEx, which is owned by TheStreet, publisher of this website. That's a big change from previous eras like the 1980s and 1990s, when serving on several boards at the same time was typical.
So who's making the grade?
There's no easy way to measure boardroom performance, since boards don't manage companies directly, but oversee those who do. Likewise, there are usually about a dozen people on a board and not all of them have equal roles. Moreover, boards have revolving doors, with directors coming in and going out at different times.
Still, correlating a company's stock performance with the presence of individual directors on the company's board can be a useful exercise even if doesn't mean an individual director caused that performance.
"This is an association, at best," said Stanley Peterburgsky, a professor in finance at Brooklyn College. "But it doesn't mean it's insubstantial."
Using data from BoardEx, we looked at all the independent directors in the 30 companies in the Dow Jones Industrial Average and compared the performance of their companies' stocks during their board tenure to that of the Dow during the same period. Then we annualized those performance numbers and calculated an average across all the boards an individual served on.
"This is like a batting average for board members," said Peterburgsky, who reviewed our formula. "Taking an annual rate and then an average gives you a sense of how they might do if they were 'traded' and went to another company."
Since board members with management roles obviously have a much more direct impact on a company's performance and stock price, we threw out instances of inside directorships for each board member. We also limited our pool to directors who served on at least two outside boards and tossed out cases where a director served on a board for less than a year, in order to look at more substantial, longer-term performance. Obviously, we couldn't account for membership on the boards of private companies.
After stripping out all those cases, we arrived at a universe of 136 directors out of the roughly 300 directors on Dow boards and then ranked them by their outperformance.
A good outperformance number can have all sorts of different meanings behind it. It can point to a knack for corporate governance and decision-making, but it can just as easily mean a successful professional network, good market conditions for a particular industry, or maybe even that the director has a great headhunter, placing him or her on up-and-coming companies.
Conversely, a bad outperformance number doesn't necessarily mean a bad board member. It can mean an underperforming sector, a period of contraction in the economy or a long-term growth strategy that the director didn't stick around for. Similarly, directors choose the boards they want to serve on for all sorts of reasons. They might even be attracted to the challenge of helping run a company that's lost its footing.
All that said, here are the directors on boards in the Dow whose companies on average have outperformed the market by the largest margin over the course of their tenures. It's worth noting that half of our top scorers were female. That's remarkable considering women hold only 17% of the board seats on Fortune 500 companies in total, according to data from Catalyst, a women's workplace advocacy organization. Of the 136 board members that met our criteria, 37 of them, or 27%, were female.
All the numbers are up-to-date as of December 21, 2015.