The Wall Street Journal reported on MSCI’s research that overboarding of directors has been declining over the last 10 years. The term “overboarding” intends to describe the phenomenon when directors of publicly listed companies sit on too many boards simultaneously. MSCI concluded that 5% of the directors of S&P 500 companies occupy four or more director spots, down from about 25% a decade earlier. Ten years ago, 308 individuals occupied six or more board seats – as of 2015, there are only five individuals spread across so many director posts.
Widely accepted intuition seems to be affecting behavior – hard evidence doesn’t really exist one way or the other given, not unexpectedly, the issue of isolating overboarding as a single impacting factor on director effectiveness (measured through proxies). Most robust data exists on a director’s time commitment to a single board as a necessary input for effectiveness: the annual average time commitment per director appointment is unequivocally trending upwards according to multiple sources: approximately by 55% in a decade from 156 hours in a 2003 survey to 248 hours in 2014 – data points from surveys in between fit the trend. Of course, actual numbers for an individual director vary based on background, committee roles and level of crisis, when the directors need to be able to tap into the unexpected time cushion.
Points made about about quality of directorship based on the broad spectrum of experience, exposure and independence due to the variety of many directorship are directly opposed to those views that fear lack of focus and a loss of independence due to too many relationships. The perspectives appear to align with the interest group the respective voices are representing – thus, not helpful in shaping an objective view of substance.
The argument that preventing overboarding will hurt women and minority director representation appears more of a symptom of the overall lack of diversity that ought to be fixed rather than a robust argument against overboarding.
If overboarding is to be intuitively avoided then the next question is whether numerical thresholds should be prescribed or whether avoidence through principled behavior is favored.
Proxy advisors ISS and Glass Lewis are both recommending very similar numerical limits for their 2016 and 2017 proxy season guidelines for the US – a limit of five director posts for non-executives and two outside director appointments for actively employed executives. Violations of that recommendation will result in No votes starting in 2017, barring certain exceptions for transition periods and subsidiary boards. From the perspective of proxy advisors, who need an objective basis to operationalize proxy recommendations for hundreds of shareholder votes annually, this appears to be a pragmatic approach to identify the majority of overboarding cases and arrive at voting recommendations efficiently.
The National Association of Corporate Directors (NACD) and the Society of Corporate Secretaries and Governance Professionals agree with the principle of ensuring effective directorships but shun arbitrary numerical limits and favor self-regulation and situation-dependent behaviors – not surprisingly as that would encompass almost all their possible stakeholder positions, and in line with notion that there is no evidence for such numerical thresholds. They further argue that processes for reporting of director attendance and voting on directors in general are existing avenues to address ineffective directors no matter what the underlying reason.
The number of corporations that limit director appointments as part of their own governance principles, i.e. self-regulation, has indeed been steadily rising: while 20% of large corporates addressed this in 2004 the number had risen to 75% by 2014. Albeit, the Boston Globe reported that disclosure, appropriate information flow and enforcement may sometimes be lacking to ensure avoidance of overboarding in practice. Further, directors not receiving a majority vote may not always be on their way out given common exception clauses that a director resignation may not have to be accepted.
In the bigger picture, the news is positive: a trend away from overboarding. Proxy advisors and the media play a crucial role in identifying the remaining outliers and putting on pressure when warranted while any overly prescriptive threshold may just be a distraction of form over substance and underlying principle.