Are stakeholders really expecting too much from boards?
Restricting the number of outside board seats a director can hold is prudent for improving the likelihood of better ESG outcomes.
Hi there,
Today I’m going to write a brief note about overboarding - the situation where a publicly listed firm has a director who has too many other board commitments. I think it’s quite a stretch to read suggestions last week that some stakeholders are expecting “too much” from boards.
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Over the past few years, director commitment policy has emerged as a quantitative ESG metric many institutional investors, proxy advisors, and ESG rating agencies measure. They count the number of outside board seats held by each director and vote against re-election if that number exceeds their policy. Outside commitments are usually disclosed in the governance section of the annual report in some detail.
Heading into the 2020 proxy season, three institutional investors, State Street Global Advisors (SSGA), T. Rowe Price and AllianceBernstein, have tightened their director commitment policies. This follows similar actions by BlackRock in 2018 and Vanguard which adopted its first overboarding policy in April 2019. Vanguard subsequently modified its policy in early 2020 to allow some flexibility to consider company-specific facts and circumstances. As a result of these strengthened investor policies, non-executive directors who serve on more than four boards and CEOs (as well as NEOs for certain investors) who sit on more than one outside board can expect to see a decrease in support as compared to prior years.
Source: Institutional Investors’ Overboarding Policies for Directors
How many board seats is too many?
I think that the typical US limits of 3 outside board seats for CEOs and 4 outside board seats for non-executive directors are very generous. Many employees of those same entities aren’t even allowed to have a lemonade stand or a gig economy job.
However, it’s not clear that non-profit charitable or political activities should be excluded too - some involve considerable time commitments and present possible conflicts of interest that need to be managed carefully. For larger charitable boards, they are perhaps more involved than many medium-sized corporations and should count the same as a listed entity outside board appointment.
In fact, I think that an outside board seat limit of 2 would be even better. And I’d even suggest that an outside board seat limit of 1 for a CEO would be appropriate, particularly for large listed entities.
Here’s why:
context switching between different companies is expensive and time-consuming
the more entities are involved, the more complexity
without a hard limit, some will always argue for an extra board seat
diversity increases one retirement at a time - forcing many resignations opens up opportunities for new perspectives at board level
non-profit activities have overhead too - dinners, meetings, fundraising
close board-level relationships across the value chain could present anti-trust risks
the less potential for conflicts, the less likely they’ll arise
In an ideal world, other than growing their experience in governance matters, I can’t see why you would want your CEO on another company’s board of directors. In fact, the bizarre arrangements where some very experienced corporate leaders are chairs of multiple listed companies is an interesting outcome of the different governance arrangements around the world.
Stakeholders aren’t expecting too much from boards when they expect them to put in place strong frameworks and reporting to hold management to account. If the increasing agendas and workload makes things difficult, the answer isn’t to push back on stakeholder expectations.
The answer is to reduce other board commitments so that an appropriate level of focus is given to vastly increased risk and compliance obligations on listed entities in 2020. Governance is part-time from an outside perspective but in a crisis or in times of higher regulatory scrutiny can become all-consuming for the directors involved.
It’s much easier to restrict the number of outside board seats a director can hold, and in fact, I’d expect an increasing focus on this over time from regulators as the evidence of better ESG outcomes develops.
I’d be interested in hearing your perspectives on this matter. Should there be regulation of this or should each company develop its own policy that exceeds what the proxy advisors expect?
Regards,
Brennan