This S&P 500 Company's Board Makes Its Stock a Long-Term Buy

Fortune released its list of the 25 most innovative S&P 500 boards of directors on April 19. At the top of the list is Microsoft (MSFT), the $2.1 trillion tech giant. It’s tempting to pick MSFT as the best stock to buy, given what CEO Satya Nadella’s done with the business since taking the helm in February 2014 and call it a day. 

However, I’m going to go off script a little, selecting the S&P 500 component on Fortune’s list that has one of the youngest boards of directors by average age. That’s contrary to what The Modern Board 25 is all about. 

“As companies seek to drive change on talent strategy, diversity, sustainability, and social issues, they’ll need more diversified leadership at the very top. But they’ll also need the insight and strength that come with experience,” Fortune states. 

While I don’t disagree that experience is important when filling board positions, too much experience could put someone in place who’s not a progressive thinker, or unwilling to adjust to the changing times. 

The Average Age of Today’s S&P 500 Boards

Many of the index’s boards today -- despite the push for change in recent years -- are filled with older, retired executives. According to SpencerStuart, the average age of new S&P 500 independent directors is 57.8, while the average age of all S&P 500 independent directors is 63. The average age and tenure of departing S&P 500 directors in 2020 were 68.5 and 12.7 years, respectively. 

In some ways, this mirrors the average age and tenure of politicians serving in the Senate and House of Representatives. It’s the reason some Americans are calling for term limits. But I digress. 

In the end, most directors serve on boards to keep busy after slowing down their business lives in retirement or semi-retirement. Like politicians, it probably shouldn’t be that way. Younger board members in their 40s or 50s are in the prime of their careers and likely to make greater contributions to any boards they sit on. 

I might be in a minority but that’s how I feel. Let’s move on to picking the best company amongst Fortune’s top 25. Here’s a table of the top 5 on the magazine’s list with the average age of their board and three-year annualized total return. 

Microsoft Has the Best Performance

Of the top five listed above, the best-performing stock over the past three years is Microsoft. It just coincidentally happens to have a board with one of the lowest average ages. While you can argue that it is a tech company, and they tend to skew younger, the name of the game is shareholder returns. From that perspective, Microsoft is clearly the best stock to buy. 

However, before I crown Microsoft the winning pick, let’s examine the top five from Fortune’s list, excluding tech companies. 

A quick look at the top five non-tech companies shows the average age of a board doesn’t necessarily affect the performance of its stock. Nonetheless, Baker Hughes has generated a reasonable return over the past three years while also possessing a board with an average age under 60.

Fortune states the following about the 25 names on its list, “At a challenging time, these companies are setting themselves up well strategically for long-term, sustainable growth.”

It’s fair to argue that boards are forward-looking by nature and thus, past returns are somewhat meaningless. That said, named executive officers and the board are generally compensated for delivering above-average shareholder returns in past years. 

So, past performance matters even for innovative boards. 

Are Any Other Names Worth Considering

Without calculating the average age of all 25 boards, it’s hard to say whether Fortune’s methodology is one worth investing. In three years, we’ll have a better idea if The Modern Board 25 held its own. Except for outliers such as Microsoft, I suspect that an equal-weighted portfolio of the 25 names won’t do much better than the S&P 500 itself. 

According to CGLytics, which is affiliated with Diligent, the people Fortune partnered with on The Modern Board 25, released a study in 2018 that found there was “a clear and positive correlation between the number of younger board members and the Total Shareholder Return (TSR).”
In the future, I’ll go into further detail about what younger directors bring to S&P 500 boards. For now, it’s safe to say that Microsoft’s board delivers the goods for shareholders. Of all 25 names on Fortune’s list, MSFT is the one to own over the long haul.