Few laws exist to limit the number of board of directors seats an individual can have, though plenty of recommendations and guidelines are out there, including some from governmental sources. While ESG and other matters lengthen directors’ to-do lists, Kuberno’s Zoe Bucknell argues that hard limits may have unintended consequences.
Overboarding, the practice of directors sitting on too many boards, has gained increasing attention recently as investors continue to ramp up their scrutiny of company governance practices. The concern stems from the fact that overboarded directors may be stretched too thin to properly carry out their duties or lack the necessary degree of independence due to their other interests.
The issue made headlines last year after BlackRock voted against the reappointment of Sanford Robertson to the board of Salesforce for holding too many board positions and Egon Durban at Twitter for sitting on seven public company boards of directors.
In the U.S., Institutional Shareholder Services, a leading proxy advisory firm, recommends voting against or withholding votes when appointing directors if they sit on more than five public company boards, unless they are the CEO of a public company, then the limit is only two.
However, there are no official rules on overboarding in the U.S. Elsewhere, the UK Corporate Governance Code provides guidance but does not prescribe a strict limit on how many board positions non-executive directors can hold. Instead, it emphasizes that individuals must allocate sufficient time to each company to discharge their responsibilities. (The code does stipulate that company executives should take on only one additional directorship within the FTSE 100.)
Many directors would approve of this approach, arguing that setting a numerical limit of board seats is arbitrary. Different individuals have varying levels of capability, different positions require different levels of commitment, and there are plenty of other factors that could shift a director’s focus aside from sitting on public company boards, the argument goes. Who’s right?
Family Ties: How Hackers Target the Personal Lives of Board Members
Robust cybersecurity measures for employees, executives and board members are increasingly pushing fraudsters to find other targets — and they are. By targeting board members’ homes and even their families, cyber criminals can gain access to a human supply chain of compromised accounts.
Read moreDetailsWidening responsibilities
The increasing focus on ESG has expanded the level of responsibility directors must assume as they are no longer solely concerned with the financial success of the company. Instead, they are now seen to have a duty to protect the environment and promote the greater good. These tasks have, of course, added to directors’ burdens and led to a corresponding increase in the amount of time they need to commit to the role. It is unsurprising, then, that research showed 60% of non-executive directors said their role has become more demanding, primarily due to heightened regulatory requirements and increased time spent in board meetings.
As new regulations and other requirements come online, it’s important that companies are continuously monitoring to ensure they’re able to properly anticipate increases in the expected time commitment for directors. This is especially true because it can be difficult for directors to assess themselves what developments may have on the amount of extra time they need to commit.
Investors leading the charge
The most prominent efforts against overboarding have been made by institutional investors concerned that overboarded directors will hinder board performance. Many have established policies to limit how many boards a director may sit on before they vote against their appointment. This number varies between each institution but tends to be around three or four board seats. Institutional investors also tend to have tight restrictions for public company executives due to the exceptional demands of their leadership roles.
However, these policies may fall short of investors’ expectations since they often exclude directorships of private companies or charitable organizations, which can be equally time-consuming. Additionally, setting hard caps on board seats can inadvertently create a target to achieve rather than a maximum threshold.
In light of these limitations, perhaps the less prescriptive approach taken by the UK Corporate Governance Code provides a better framework to assess whether directors are able to meet their commitments than specifying a hard number limit.
Ultimately, the onus is on companies and directors themselves to develop effective methods for assessing commitment levels, both during the appointment process and on an ongoing basis. To ensure directors can meet their commitments, companies should estimate the time required and confirm this with directors during the recruitment process. Companies must investigate other time constraints a director may have, which can be facilitated through the collection of directors’ interests data.
Different companies will demand varying levels of commitment, so applying a one-size-fits-all approach to time allocation will always suffer from its inherent inability to assess those variations. Annual discussions on time commitments should be integral to board evaluations, alongside annual reviews of directors’ interests.
How do companies respond?
It is the responsibility of the board chairperson to manage its members and ensure directors can fulfill their duties adequately. The chairperson should engage in one-on-one conversations with each director to gauge their availability, monitor their attendance at board meetings and assess their flexibility to participate outside of scheduled board meetings. This responsibility extends beyond board meetings to encompass the broader role of supporting the organization, and it should factor into annual board effectiveness reviews. Directors themselves also bear the responsibility of ensuring they possess the capacity to discharge their duties effectively to the board, the company and other stakeholders.
Across the pond
In the European Union, particularly in the financial services sector, there has been a proactive approach to addressing this issue. EU regulations have taken a prescriptive stance on board positions, which leads to the same shortcomings as when institutional investors set limits. That is, setting a maximum number of positions can often be misinterpreted as a target to achieve rather than a cap. It tends to divert attention away from the critical consideration of actual time commitment, which is the key criteria and requires careful analysis on a case-by-case basis.
In the U.S., a comparable challenge exists. Listed companies are required to conduct director and officer (D&O) questionnaires annually. However, in practice, these surveys often serve more as compliance exercises than as comprehensive assessments of director commitments. While they may capture some relevant information, they may not delve deeply enough into the actual time board members dedicate to their roles.
The shared experiences between the UK, Europe and the U.S. underline the complexity of addressing overboarding and overcommitment. The fact this issue is present worldwide shows that there is no easy fix, but the best approaches are nuanced and adaptable rather than focusing on rigid numerical limits. The emphasis should be on fostering a culture of diligent assessment and monitoring to ensure that directors can effectively fulfill their responsibilities. From a practical perspective, boards can look to leverage the existing D&O questionnaire and board evaluation processes, including using technology to support data gathering and analysis. By doing so, companies can better navigate the intricacies of modern governance, regardless of where they operate.