External search for directors bring higher ROEs, reveals NUS study

Good governance is the name of the game.

Listed firms that engage external search firms in the hunt for directors enjoy higher return on equity, a study by the National University of Singapore (NUS) Business School’s Centre for Governance, Institutions and Organisations (CGIO) revealed.

Fresh analysis of data collected for the annual Governance and Transparency Index (GTI) found that, over a five-year period, SGX listed companies that engaged external search firms when appointing new board directors had an average ROE of 8.16%, compared to 5.5% among companies that did not disclose they used such search firms.

However, the proportion of listed companies engaging search firms for board director appointments is small, making up only 17.1% of SGX-listed companies, even though this has grown from 4.5% in 2010.

“The board of directors is the pinnacle governing body of the company. Appointments to the board have to be more systematic and go beyond the casual approach often being used now. A structured approach, like using external search firms to pick directors, is a good governance practice as shown by our Governance and Transparency Index (GTI) findings over the years,” said Lawrence Loh, associate professor at NUS Business School and leader of the GTI project at the School’s CGIO.