Governance Explainer Overboarding

Last year, it emerged that BlackRock, the giant US funds group, was clamping down on company directors in the US tech sector who sit on too many boards.

Hard Rock

For three consecutive years, it voted against Alphabet board member, Ann Mather, because she sat on an “excessive” number of boards – in what has become known as ‘overboarding’.

The pushback from investors stems from concerns that directors who hold too many board positions across multiple organisations won’t have the time to properly prepare for meetings and may also lack the specific knowledge required to carry out the role properly.

According to this perspective, some companies and industry sectors are extremely complex and require a significant commitment of time and expertise. This is exacerbated if the director is on the board of a company in a moment of crisis, when even more of their time, energy and attention will be needed.

As a result of the pressure from BlackRock, Alphabet, the Google parent group, changed its rules to prevent members from serving on more than five boards, including its own.

This was a partial nod to the demand of BlackRock for directors to serve on no more than four company boards.

Other investor groups are also agitating for directors to trim their board commitments. Vanguard has said it would generally vote against people who served on more than four public company boards.

What is best practice?

The UK Corporate Governance Code says that full-time executive directors should not take on more than one FTSE 100 non-executive director role. But that’s the only numerical restriction relating to overboarding that the Code prescribes.

This contrasts with the situation in France, where the French Code defines an upper limit of four listed company directorships for any one individual.

A common view in the UK business community is that the decision around how many board positions is reasonable is a matter for boards to assess on a case-by-case basis. Every situation is different, and the imposition of numerical limits would be excessively prescriptive.

However, institutional investors – like BlackRock, Vanguard and Legal & General – and proxy voting advisers are taking a harder line, adopting a points-based system to assess whether an individual is overcommitted.

In the UK, Institutional Shareholder Services (ISS), the leading proxy adviser, has a five-mandate limit where a non-executive directorship counts as one mandate, a non-executive chair counts as two, and a position as executive director is counted as three.

Directors who breach the five-mandate limit face the prospect of a large investor vote against their appointment at the annual general meeting.

Why Do We Have This Issue?

Companies regularly complain that they are fishing in a small talent pool to secure good executive and non-executive board members. As a result, the best and most experienced directors inevitably end up holding several positions at any one time.

In addition, it may be beneficial to appoint board members that are active in other companies or industries, enabling the cross-fertilisation of new business ideas and practices to take place.

The problem of overboarding can become acute when companies are looking to boost the number of women or other underrepresented groups on their boards. A report by index provider MSCI found that 22% of female directors of companies in the flagship MSCI ACWI global equity index serve on three or more boards, compared with 12% of men.

How Can Companies Avoid Overboarding?

Before appointing a director, the board should consider the number of other positions held by the candidate on company boards and committees. This could also extend to their commitments with organisations like charities, school boards and arts councils.

Boards need a complete picture of what is required from these other roles and whether that leaves sufficient time for a further appointment.

After a director is appointed, he or she should be obliged to update the board on a real time basis if he/she plans to join other boards, and gain its approval. This is not a case of boards inserting themselves into a director’s private business. Boards need to reassess if the director can still do the job.

One factor that a board will need to consider is the circumstances of the other companies with which a director is involved, and the likely time demand that this is likely to impose. A company that is stable will have different demands to one in distress or pursuing a major change of direction.

Board performance reviews (also known as board evaluations) should also consider whether individual directors are overboarded. This is not something that they tend to do, although there are exceptions. Companies may also wish to define clear guidelines which articulate their own policy with respect to overboarding.

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