Institutional investors in Europe see management risk as the most significant risk factor when making an investment decision, with 87% regarding it as very important, according to a new report by executive search firm Russell Reynolds Associates.
By contrast, investors in North America regarded credit risk as the most important risk. In Asia market risk was most important. The report, “Russell Reynolds Associates’ 8th Survey of International Institutional Investors”, surveyed 101 investors from a full spectrum of equity fund types throughout Europe, North America, and Asia.
The report reveals that 85% of European investors see the board as playing an extremely or very significant role in a company’s performance, while in North America the figure was 63%. As a result, while some 50% of European investors payed close consideration to the composition of the boards of companies they invest in, the figure in North America was less than 40%.
Due to this greater focus on how the board affects company’s performance, investors are increasingly viewing board composition as a differentiator when making investment decisions. The Russell Reynolds report reveals that 39% of European institutional investors scrutinise organisations’ board members more closely than they did two years ago. For North Americans, the figure was 49%. 72% of Europeans believed that boards could play a role in managing risk while in North America the figure was 55%.
Reflecting the impact of a number of high profile cases in the US, North American investors, effectively all North American respondents saw improper or unethical business practices as the most important potential management risk, far greater than all other possible risks including board battles, insular thinking or succession planning. In Europe the figure was 88%. Findings also highlighted investor anxiety within Europe over the accuracy of the financial information they receive. 90% said that failure of companies to comply with accounting and other regulations is a major concern.
The Russell Reynolds report also unearthed a number of differences in investor priorities between Europe, the USA and Asia. Whereas European investors are primarily concerned by management risk, the USA saw credit risk as the most important risk factor, and Asia rated market risk as the most significant.
Luke Meynell, Head of the Board Practice at Russell Reynolds, commented on the report’s findings: “This study shows that the role of the board is more important than ever, as investors are increasingly using management as a key factor when making investment decisions. It is therefore crucial that companies approach the selection of senior executives in a methodical and responsible manner, and work closely with their search firm to identify the best qualified person for the role, whether executive or non-executive.”