In the 2019 proxy season, “overboarding” became a center-stage issue for many companies and investors. Several large asset managers, including Vanguard, BlackRock, and LGIM, enhanced their voting guidelines to apply stricter criteria, while some directors serving on multiple public company boards faced significant opposition to their elections. The idea that directors should not serve on too many boards has been a key consideration for investors for many years.
The main concern for investors and companies focuses on the ability of
directors to fulfill their responsibilities given the significant time
commitment associated with each directorship; and as corporate governance and investment stewardship
standards evolve, so does the definition of an overextended director.
Three primary drivers contribute to the renewed interest in director overboarding:
- Board responsibilities are increasing, and directors are expected to dedicate more time to their duties. A wide variety of issues is driving the expanding mandate: increasing regulatory requirements, expectations for shareholder engagement, cybersecurity threats, disruptive technologies, climate change, human capital management, and company culture are only a few of the drivers.
- Investor stewardship efforts are growing ever more sophisticated and intensifying, as asset owners and asset managers dedicate more resources to monitoring corporate governance risks. As part of the increased emphasis on board quality, overboarding becomes a critical issue, along with board diversity, director qualifications, and board refreshment.
- More information and tools are available to investors, as disclosures on outside board mandates are better databased, and investors are able to apply complex criteria to overboarding policies that go beyond just the number of board mandates, but also take
into account individual roles and responsibilities.
In the following paragraphs, we explore varying definitions of overboarding, and we review emerging trends in investor sentiment, as demonstrated by significant votes against directors who serve on more than four boards. Finally, we examine the link between overboarding and company performance, and we find evidence of underperformance among companies with overboarded directors or executives on their boards.
Definitions of Overboarding
There is not one standard definition of an overboarded director. And adding to the problem, very few definitions include boards other than those at public companies (including non-profits and private companies), leaving a sizeable blind spot in the search for overextended directors. For the purposes of this analysis, we will limit our scope to only public-company directorships.
Some corporate governance codes of national
jurisdictions discuss the importance of directors having a manageable number of outside mandates
UK Corporate Governance Code), and a few codes set specific limits on the maximum number of directorships. However, these norms and rules typically vary by jurisdiction. While local standards typically stipulate the maximum number of board mandates, some investors take a more sophisticated approach to the definitions of overboarding by considering different thresholds based on an individual’s role at the company and the board. Below, we outline some of the key criteria that determine overboarding guidelines.
- Employment status. Directors who are
fully employed are generally expected to serve on fewer boards than
directors who do not have a full-time employment (often referred to as
professional directors). Separate thresholds may apply for C-suite executives. These criteria are generally stricter for CEOs, who are expected to serve on no more than one or two boards in addition to the board of the company the manage.
- Board and committee responsibilities. The
role of the board chair is associated with more responsibilities compared to a regular board member, so the chair of the board is expected to serve on fewer boards. In some markets, a chair role is considered equivalent to two directorships, and governance codes and investor policies set directorship thresholds for board chairs based on this logic. Similarly, some investors may establish separate limits for the lead director, the chair (and possibly members) of the audit committee, or any other significant role at the board.
- Universal limits. Independent of criteria based on specific roles and responsibilities, investors, companies, and governance codes typically set general limits on the number of boards a director can serve. From an investor perspective, these limits may differ by market, given prevailing market practice, or the investor may wish to encourage a standard of best practice across all markets. In markets where multiple directorships are more common, such as India and Hong Kong, initial regulatory efforts to curb the number of mandates set the limit to six or seven directorships. In developed markets, investors tend to expect a maximum of four or five mandates, with four boards gaining traction as the new limit among many companies and investors.
Changing Investor Expectations
Market norms and expectations regarding the maximum number of boards a director may serve are evolving. In the decade since the financial crisis, increased investor scrutiny on board performance appears to have led to a decrease on the number of directors who serve on many boards. In the U.S., the percentage of non-CEO directors who sit on five or more boards has decreased by half since 2008
from 3.2 percent to 1.6 percent.
As more investors continue to adopt stricter policy criteria on overboarding, we expect the pressure towards over-extended directors to rise. Until recently, up to five or six directorships were considered acceptable by most investors. But over the last two years, we have seen investors shift towards a new standard of no more than four public boards. Over that period, we have observed an uptick in significant opposition against the election of directors who serve on more than four boards.
In the U.S., this trend is especially notable, as proxy advisory firms have established policies that are less strict than the emerging standard (both ISS and Glass Lewis currently set an overall limit of up to five total board memberships). Hence, as with many other corporate governance developments (e.g., board gender diversity and board renewal), investors lead the way through engagement and voting, thus dispelling myths about undue influence by third parties.
As we reported in
our recent review of U.S. vote results, these new overboarding criteria seem to contribute to the highest levels of significant director election opposition at U.S. companies since 2011. The percentage of all Russell 3000 directors receiving support by less than 80 percent of votes cast increased from 2.9 percent in 2015 to 4.9 percent in 2019. However, overboarding is not the sole factor or even the primary factor for this increase in overall director opposition. The data shows that overboarding affects less than half of approximately 1 percent of director nominations. Other criteria that have recently gained momentum, such as board gender diversity and board oversight, appear to affect more companies and director nominations.
We observe a similar trend of significant opposition among overboarded executives. More than 30 percent of nominations of outside CEOs who serve on three total boards received support by less than 80 percent of votes cast in 2019, compared to only 3 percent of such nominations that received significant opposition in 2016. The figure more than doubled in the past year. Currently, the level of opposition against CEOs serving on three boards approaches the level of opposition against CEOs who serve on four or more boards, suggesting the emergence of another new standard for overboarding.
Overboarding and Company Performance
To test the potential impact of overboarding on company performance, we examined several scenarios of director overboarding and their correlation with company economic performance. As a measure of economic performance, we used ISS’ proprietary
(which stands for “Economic Value Added”). The EVA measure of profitability applies a residual income methodology that accounts for the full cost of capital (including both the cost of fixed income and cost of equity), and which adjusts for potential accounting statement distortions (e.g., R&D, advertising and promotions, and restructuring charges are capitalized). We use two metrics of profitability based on this methodology: EVA Margin and EVA Momentum over a three-year period. EVA Margin equals EVA as a percent of sales, while EVA Momentum shows the three-year trend in percentage change in EVA using a linear regression analysis. Hence, EVA Margin shows the overall level of true economic profitability, while EVA Momentum shows the level of improvement in profitability.
For both measures, companies with overboarded directors performed worse compared to companies with no overboarded directors. For the purposes of this analysis, our definition of “overboarded director” considered non-CEO directors who serve on more than four public company boards and CEOs (on the board of the company they manage or on an outside board) who serve on more than two boards. The coverage universe is the Russell 3000.
Companies that had at least one overboarded director (in either of the two categories described above) for the past three consecutive years exhibited median EVA Margin and EVA Momentum levels at approximately half of companies with no overboarded directors in 2019. Companies whose CEOs served on more than two other boards had a negative three-year average EVA Margin and low EVA Momentum, while companies with two or more overboarded directors showed the worst performance in both metrics. While further analysis is required to determine the link between economic performance and overboarding, we do see evidence of correlation between overboarding and underperformance, which supports the emerging practices by investors and companies to establish firm criteria on the maximum number of boards where a director may serve simultaneously.
Overboarding and Board Quality
In the era of ESG integration and investor stewardship, one cannot view the new trends in overboarding criteria
in isolation. In the past decade, investors have increased their efforts to monitor and ensure their interests are represented by dynamic, competent, and accountable boards. Staleness, entrenchment, and lack of oversight were considered as
key factors that may have led to major corporate scandals in the early 2000s and the financial crisis. Therefore, increased board accountability, board renewal, and board diversity serve as mechanisms to protect investor interests and counter past tendencies of complacence. The new emphasis on overboarding is part of this process of improving board quality, whereby the increased demands on boards and directors do not allow for excessive board mandates, which may have encouraged a rubber-stamp culture in the past. At the same time, by limiting the number of boards an individual can serve companies and investors encourage renewal, diversity, and inclusion, as new faces join the director ranks, including candidates with more diverse backgrounds. Our recent review of
U.S. board diversity trends finds that we see a record number of women, minorities, and new directors on boards, which suggests that the recent trends around overboarding contribute to the broader changes in board composition.
A Growing Number of Companies are Proactive
A growing number of public companies appear to address overboarding, often by placing limitations on the number of outside boards that a CEO and directors may serve on, and even putting additional limits on audit committee members as well. According to a
2018 Spencer Stuart report, 64 percent of S&P 500 companies have adopted numerical board limits for their directors, while 77 percent of S&P 500 companies have established some limit on directors’ ability to accept other directorships. Among the companies that have adopted numerical limits, 94 percent have established the limit at a total of four boards or less.
A good example of such an adoption comes from
Apple Inc.’s Governance Guidelines, which state:
"Serving on the Corporation’s Board requires significant time and attention. Directors are expected to spend the time needed and meet as often as necessary to discharge their responsibilities properly. A director who also serves as the CEO of the Corporation should not serve on more than two boards of other public companies in addition to the Corporation’s Board. Directors other than the CEO of the Corporation should not serve on more than four boards of other public companies in addition to the Corporation’s Board."
Over time, we expect more companies, including large-cap companies and eventually more smaller firms, to adopt similar measures to ensure that adequate time is available for directors to fulfill their director responsibilities.
-- Kosmas Papadopoulos, CFA, ISS Analytics