Does the right amount of board turnover affect company returns?

Does the right amount of board turnover affect company returns?

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The right amount of board turnover is important, so why do only 18 S&P 500 stocks have term limits?

An article in today's Qz suggests that the "best performing companies" typically kick out about 1 board member each year. The assertion is based on findings from the research firm Spencer Stuart, which tracked company returns and the make-up of their board.

The study found that the optimal amount of turnover was three to four board-members over rolling, three-year periods. 

The rationale behind the findings is fairly intuitive. Board directors, particularly independent ones that act as advisers, need to provide a degree of outside perspective while also having an intimate understanding of the company they're advising. 

Read more about S&P 500 companies with good corporate governmance.

Board directors are also incredibly well-compensated for pretty easy jobs. Salaries run around $250,000 a year for a position that only requires that you meet 7-8 within that time period. 

Even the most ethical of board directors is going to have trouble hopping off that gravy train. 

And that's probably why so few companies have very many guidelines in place for how long a boardmember should serve. Only 18 companies on the entire S&P 500 index have set term limits at all. 

Studying the list, only two experienced a loss in the last year. 8 companies experienced a return of at least 15% or more, and 8, almost half, had returns in excess of 30%. 

We built a screen of stocks of companies that have term-limits in place for their boards using the 9 highest returns, and listed the companies below. Will their committment to a well-rounded board continue to pay off in the future?   

Click on the interactive chart to view data over time. 

1. Walt Disney Co. (DIS, Earnings, Analysts, Financials): Operates as an entertainment company worldwide. Market cap at $139.31B, most recent closing price at $80.43.

 

 

2. International Flavors & Fragrances Inc. (IFF, Earnings, Analysts, Financials): Creates, manufactures, and sells flavor and fragrance products in the United States and internationally. Market cap at $7.62B, most recent closing price at $94.85.

 

 

 

3. Juniper Networks, Inc. (JNPR, Earnings, Analysts, Financials): Designs, develops, and sells products and services that provide network infrastructure to create environments for the deployment of services and applications over a single network. Market cap at $12.66B, most recent closing price at $25.90.

 

 

 

4. Flowserve Corp. (FLS, Earnings, Analysts, Financials): Develops, manufactures, and sells precision engineered flow control equipment. Market cap at $10.59B, most recent closing price at $77.83.

 

 

 

5. Fluor Corporation (FLR, Earnings, Analysts, Financials): Provides engineering, procurement, construction, maintenance, and project management services worldwide. Market cap at $11.99B, most recent closing price at $77.66.

 

 

 

6. Frontier Communications Corporation (FTR, Earnings, Analysts, Financials): Provides regulated and unregulated voice, data, and video services to residential, business, and wholesale customers in the United States. Market cap at $5.54B, most recent closing price at $5.55.

 

 

 

7. O'Reilly Automotive Inc. (ORLY, Earnings, Analysts, Financials): Engages in the retail of automotive aftermarket parts, tools, supplies, equipment, and accessories in the United States. Market cap at $15.17B, most recent closing price at $145.00.

 

 

 

8. Varian Medical Systems Inc. (VAR, Earnings, Analysts, Financials): Designs, manufactures, sells, and services equipment and software products for treating cancer; and x-ray products worldwide. Market cap at $8.62B, most recent closing price at $84.85.

 

 

 

9. Mastercard Incorporated (MA, Earnings, Analysts, Financials): Provides transaction processing and related services to customers principally in support of their credit, deposit access, electronic cash and automated teller machine payment card programs, and travelers' cheque programs. Market cap at $83.86B, most recent closing price at $72.07.

 

(List compiled by James Dennin. Monthly returns sourced from Zacks Investment Research.)

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