When it comes to investing in SGX stocks, the structure of a company’s board can heavily influence its stock performance. Here are five key factors you need to know:

1. Board Size: The optimal board size for Singapore-listed companies is around five members. Larger boards often face decision-making delays, which can negatively impact company value.
2. Independent Directors: These directors safeguard shareholder interests and boost stock performance by leveraging professional networks and ensuring balanced decisions.
3. CEO Duality: Separating the CEO and Chairperson roles enhances oversight and prevents conflicts of interest, which often leads to better financial outcomes.
4. Meeting Frequency: Boards that meet more frequently, especially during crises, tend to respond better to challenges and improve company performance.
5. Director Ownership: When directors own shares, their interests align with shareholders, resulting in better financial decisions and higher returns. For those looking to refine their strategy, attending a trading course in Singapore can provide deeper insights into market mechanics.

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Board Structure Explained: Models, Composition & Governance

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1. Board Size Affects Decision-Making Speed and Company Value

The size of a company’s board plays a key role in how quickly decisions are made and, ultimately, its overall value. Research on Singapore-listed companies shows an interesting trend: firms with five board members achieve the highest value, while adding more directors tends to reduce it. This finding opens the door to a closer look at how board composition impacts company performance and stock picks.

A 2005 study of 460 companies listed on the Singapore Exchange (SGX) found that firms with five directors achieved a Tobin’s Q of 2.4. However, this figure dropped to 1.8 for boards with seven to eight members and plummeted to 1.0 for boards with 14 members. The decline is largely due to coordination challenges that arise as boards grow larger.

When more directors are involved, reaching a consensus becomes harder. The need for compromises increases, which slows down decision-making. To address this, the Singapore Code of Corporate Governance recommends that boards maintain an “appropriate size” and suggests forming Executive Committees to handle urgent decisions efficiently. But how does the independence of these directors influence governance outcomes? That’s an important question to consider.

2. Independent Directors Protect Shareholders and Improve Stock Prices

Independent directors, free from personal or financial ties to the company, play a vital role in safeguarding shareholder interests. As Eugene F. Fama aptly puts it: “The board of directors is the central internal control mechanism for monitoring managers”. This impartiality doesn’t just build trust – it also translates into better stock performance. Many investors use systematic trading strategies to capitalize on these performance trends.

Beyond ensuring balanced decision-making, independent directors contribute to stock gains by tapping into their professional networks. Research shows that firms with highly connected boards – where directors have strong professional relationships – experience 4.68% higher average annual risk-adjusted stock returns compared to companies with less connected boards. The loss of a well-connected independent director can significantly impact shareholder value, far more than losing an ordinary independent director.

These directors also act as a safeguard against poor corporate practices. They help prevent harmful mergers and acquisitions, curb earnings manipulation, and discourage excessive cash hoarding. For example, after the 2003 NYSE and NASDAQ rules requiring independent nominating committees, companies saw a noticeable increase in CEO accountability. Underperforming CEOs were more likely to face consequences, linking turnover more directly to poor performance.

“Powerful independent directors better detect and counter CEO missteps because of better access to information, greater credibility in challenging errant top managers, or both.” – Kathy Fogel, Liping Ma & Randall Morck

Selecting the right independent directors is essential for effective governance. Directors with strong social network power bring valuable information and have the authority to challenge management when necessary. For investors focusing on Singapore-listed firms, it’s worth checking whether critical committees – like audit and nominating – are staffed with truly independent directors. This can offer a clear indication of how well shareholder interests are being prioritised.

3. CEO Duality Affects Oversight Quality and Stock Returns

CEO duality happens when the same person holds both the CEO and Chairperson roles. This setup creates a clear conflict of interest since it essentially means the CEO is responsible for monitoring their own performance. Such a concentration of power can weaken shareholder protection and reduce the effectiveness of management oversight.

Studies consistently show that separating these roles leads to better financial results. For example, a six-year study of 141 companies revealed that firms with independent board leadership outperformed those with CEO duality on various financial metrics. When the Chairperson is independent, they can evaluate the CEO’s decisions more objectively, avoiding the awkwardness of self-assessment. In Singapore’s market, where blockholder ownership is prominent, this separation becomes even more critical.

In SGX-listed firms, governance challenges tied to concentrated ownership are especially pronounced. With over 60% blockholder ownership in many Singapore-listed companies, decisions about separating the CEO and Chairperson roles often depend on ownership structure and the CEO’s tenure. Interestingly, firms with strong blockholders are more likely to separate these roles, while longer-tenured CEOs are often found holding both positions.

“Firms opting for independent leadership consistently outperformed those relying upon CEO duality.” – Paula L. Rechner and Dan R. Dalton

A broader study spanning 10,314 firm-year observations across 34 countries found a positive relationship between CEO duality and firm performance. However, strong board capital can offset the risks associated with this leadership structure. Boards with directors who bring exceptional skills, experience, and extensive professional networks can help mitigate oversight challenges posed by combined leadership. For Singapore investors, it’s essential to evaluate whether companies with CEO duality have genuinely independent and well-connected directors. This assessment can provide insight into how board structure influences stock performance. For more insights on market trends, explore our systematic trading analysis.

4. More Frequent Board Meetings Improve Crisis Response

Board meetings play a crucial role in crisis management, stepping up when companies face challenges. Research shows that boards often increase their meeting frequency in response to falling share prices or declining performance. For example, during the COVID-19 pandemic, a study focusing on SGX-listed firms from 2018 to 2020 found that more frequent board meetings significantly boosted financial performance during the crisis. These additional meetings provide directors with the time needed to share ideas and take effective action when it’s most critical. Another study involving 307 firms revealed that periods of unusually high board activity were often followed by notable improvements in operational performance, especially for companies that had been underperforming. This uptick in meetings signals a board’s readiness to address emerging challenges head-on.

“Board meetings serve as a fire-fighting device rather than as a proactive measure for improved governance.” – Nikos Vafeas, Professor, University of Cyprus

For investors in Singapore, particularly during economic downturns, the frequency of board meetings can serve as a measure of governance quality. The Singapore Code of Corporate Governance requires companies to disclose the number of board meetings held and each director’s attendance in their annual reports. Firms that hold more meetings during crises demonstrate an engaged board, which helps safeguard the value of future investments.

Data further supports this point – companies see about a 13% reduction in stock price crash risk after implementing board reforms that enhance oversight and transparency. In Singapore, where concentrated ownership structures and Government-Linked Companies are prevalent, frequent board meetings act as a critical internal control mechanism, particularly when external market forces lose their effectiveness. For investors, this translates into stronger protection of shareholder value during uncertain and volatile market conditions.

5. Director Ownership Aligns Interests and Increases ROA

When directors own company stock, their financial well-being becomes directly tied to the company’s success. This alignment of interests often leads to decisions that benefit shareholders. A study conducted between 2018 and 2020 in Singapore and Indonesia found that managerial ownership significantly improved financial performance during the COVID-19 period.

By owning stock, directors are incentivised to prioritise shareholder value, as their personal wealth is on the line. This discourages actions that could undermine the company’s value. For example, data from Singapore-listed firms revealed managerial ownership levels ranging from 0% to as high as 87.5%, with an average of 21.7%.

“The greater the percentage of stocks owned by top managers, the more likely they will make decisions consistent with maximising stockholders’ wealth since that will maximise their own wealth.”
– Jensen and Meckling

Interestingly, even small ownership stakes, such as 0%–5%, can positively influence alignment. The benefits become even more pronounced at higher ownership levels, ranging from 25% to 100%. These findings highlight the critical role director ownership plays in promoting stability and sound decision-making.

For investors in Singapore, director ownership serves as a key governance indicator. It signals a shared risk and commitment to the company’s success, which can be especially reassuring during trading discipline in volatile markets or economic downturns. Research also shows a strong correlation between higher director ownership and improved return on assets, reflecting better operational performance and value creation.

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Conclusion

The structure of a company’s board plays a pivotal role in its success. The five factors we’ve discussed – board size, director independence, CEO duality, meeting frequency, and director ownership – are all interconnected, influencing both corporate performance and stock market reactions. Boards with strong networks and strategic governance often set companies apart, highlighting the importance of thoughtful leadership.

Good governance isn’t just about ticking boxes; it’s about creating a framework where directors act as responsible stewards. Their decisions should aim to maximise shareholder value while managing risks effectively. When boards strike the right balance, they inspire investor confidence, leading to steadier stock prices and long-term growth. In Singapore, where approximately 57% of directors are independent, the shift towards majority-independent boards reflects a growing focus on accountability and transparency. This trend underscores how various board characteristics come together to strengthen governance.

For investors, understanding board structure is crucial – it serves not only as a safeguard against risks but also as a driver of performance. A smaller board might make quicker decisions, but without proper independence or oversight, speed alone won’t safeguard shareholder interests. Similarly, separating the roles of CEO and Chairman can improve checks and balances, but only if the board is equipped with the right expertise and connections to provide effective oversight.

For traders assessing companies, evaluating board structure offers valuable insights into governance and financial health. Recognising how these factors impact performance can guide smarter investment choices and help identify companies poised for sustainable growth. Platforms like Collin Seow Trading Academy offer tools and education to integrate these governance insights into more informed trading strategies.

FAQs

How does the size of a company’s board influence decision-making and its overall value?

The size of a company’s board plays a crucial role in shaping its decision-making process and overall performance. When boards are larger, reaching a consensus can become more challenging, often slowing down decisions. This delay can directly affect performance indicators, such as a 2–3% drop in Return on Assets (ROA), along with lower profit margins and reduced company valuations.

On the other hand, smaller boards tend to be more nimble, allowing for quicker decisions and often leading to higher valuations. However, finding the right balance is essential – companies need to maintain efficiency while ensuring they have a mix of perspectives to guide their strategy effectively.

What risks does CEO duality pose to shareholder interests?

CEO duality happens when the same person takes on both the CEO and board chair roles. This setup centralises authority, which can weaken the board’s independence and make it more challenging to oversee the organisation effectively. Such a structure may hurt the company’s overall performance and reduce safeguards for shareholders.

With fewer checks and balances in place, CEO duality can also lead to conflicts of interest. These issues might undermine investor trust and potentially affect the company’s stock performance over the long term.

How does director ownership help align their interests with shareholders?

When directors hold shares in a company, their interests naturally align more closely with those of the shareholders. By having a personal financial stake, directors are more inclined to focus on decisions that drive the company’s long-term success and, by extension, shareholder value.

This shared interest promotes accountability, encouraging directors to make choices that not only strengthen investor trust but also support improved stock performance – ultimately benefiting everyone involved.