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External search for directors linked to higher ROEs: NUS Business School

COMPANIES which engage external search firms to appoint new board directors enjoy higher returns on equity (ROEs), research by the National University of Singapore (NUS) Business School has found.

Over a five-year period, Singapore-listed companies that engaged external search firms had an average ROE of 8.2 per cent, compared to 5.5 per cent among companies that did not disclose if they used such search firms, NUS said in a press release.

The proportion of listed companies engaging search firms for board director appointments is small, NUS said. Only 17 per cent of Singapore Exchange-listed companies did so, up from 4.5 per cent in 2010.

However, it is unclear from the press release whether higher ROEs are caused by employing external search firms for directors, or whether more profitable firms tend to employ these search firms - or whether there is a third factor linking the two.

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The research was done by NUS Business School's Centre for Governance, Institutions and Organisations (CGIO), which analysed data for its annual Governance and Transparency Index (GTI). Over 600 Singapore-listed companies every year are studied for the GTI.

Lawrence Loh, associate professor at NUS Business School and leader of the GTI project at CGIO, said that the process of appointing board directors has to be "more systematic and go beyond the casual approach often being used now". 

He tod The Business Times that while firm performance is dependent on a broader set of factors, including industry and market conditions, having a proper and structured selection of directors is an important foundation of good corporate governance. "It is likely that this strong corporate governance base leads to good business results," he said.

Singapore's Diversity Action Committee, chaired by Singapore Exchange CEO Magnus Bocker, recently partnered five executive search firms to launch a set of best practices for board appointments and board diversity