Director overload

Pressure on directors to hold fewer board roles is intensifying as proxy advisers, shareholder groups and academic researchers caution against too many directorships. But what of the downside of reducing board roles to appease market pressure?

Professor Anne Wyatt, of the University of Queensland, says it can be advantageous for Australian directors to hold multiple board positions. “Although there is a common-sense limit to how many board roles a director can hold, we should not discount the benefit of directors working across organisations and industry. Multiple directorships can be valuable, particularly in larger organisations that need directors with diverse experience and skills.”

A debate on director busyness has been unfolding for two decades. It was common for some directors in the early part of this century to hold half a dozen or more board roles in ASX 200 companies, including a chairmanship or two, not-for-profit board roles and consultancy work.

In 2016, only four individuals held four board seats on ASX 200 companies, according to the Australian Council of Superannuation Investors’ latest board composition and director pay survey. ACSI found 182 individuals held 418 board seats, or 2.3 on average.

Proxy advisory groups, here and overseas, have aggressively targeted issues of perceived “overboarding”, at annual general meetings. Although there is no prescribed limit, a maximum of 3-4 board roles (in larger listed companies) or two chairmanships (the equivalent of two NED positions), seems to be current market expectation.

Proponents of fewer board roles argue it allows directors to spend more time on each role. Also, fewer positions creates spare capacity for directors during a crisis, such as a takeover. A director with too many roles could struggle to free up time to attend, say, 50 board meetings instead of the usual eight in a year when the company faces a hostile takeover.

Expanding the director “gene pool” is another argument for fewer directorships. Having a core group of directors holding too many board seats limits possibilities for others. Emerging directors struggle to secure ASX 200 board roles if others monopolise them. That limits director diversity, the injection of fresh talent on boards and a larger governance community.

Lack of conclusive evidence on director busyness

Academic research on the effects of director busyness and firm performance is mixed. Most studies are based on larger overseas markets and do not account for Australia’s relatively smaller business sector and governance community.

Research published this month in the Harvard Law School Forum on Corporate Governance and Financial Regulation found about 70 per cent of firms in its worldwide study have “busy boards”. And that the corporate world views busy directors as “ineffective directors”.

The authors, Stephen Ferris, Narayanan Jayaraman and Stella Liao, found that firms with busy boards have reduced profitability and lower market-to-book ratios. Directors with too many board roles have less ability to provide value to their firms, suggests the research.

Professor Jeremy Kress, of the University of Michigan, in July argued that director busyness could cause the next financial crisis – a position examined in the Governance Leadership Centre’s newsletter that month.

Kress said directors who have too many commitments were less inclined to participate actively in corporate decision-making. They were likelier to miss board meetings and tended not to challenge management. The drawbacks of director busyness are “especially severe for large financial institutions because of the unique governance demands imposed on their boards”.

Other US research supports busy boards. Field, Lowry and Mkrtchyan (2011) in the prestigious Journal of Financial Economics find busy boards contribute positively to firm value for Initial Public Offerings and in fact all but the most established firms.

Also in the Journal of Financial Economics, Falato, Kadyrzhanova and Lel (2013) present evidence from the US setting that the market’s perception of too busy appears to be concentrated on director interlocked firms.

Wyatt says there are sources of dysfunction that could easily outweigh any negative busy board outcomes. “Unlike the Australian setting, US companies commonly have a dual CEO-Chair. This phenomenon potentially is a greater problem than a busy board given the Chair is responsible for the board while the CEO is responsible for the company’s operations. Making one person responsible for governance and the board agenda and decision making, oversight of strategy, implementing strategy, and possibly setting their own compensation looks like a much bigger problem than a busy director or two.”

Case for fewer board roles

The benefit of fewer board roles, at face value, is obvious. As ASX 200 companies become larger and more complex, director workloads are increasing from expected governance issues and from a rise in corporate crises and other unexpected events.

The rise of shareholder activism also strengthens the case for fewer directors, as listed-company boards spend more time on stakeholder communication and investor relations – and as activists aggressively target perceived laggards in Environmental, Social and Governance (ESG) issues.

Rising workloads of not-for-profit directorships further add to concerns about board workloads and availability, particularly when directors combine for-profit and NFP roles.

However, director busyness may be an easy, overly simplistic target for governance critics. Tallying directorships is straightforward, but it gives no insight into a busy director’s boardroom performance. The view that busy directors, measured by board roles, are ineffective directors is a generalisation that may be untrue of many.

Wyatt says the key is not how many board roles each director has, but whether the board is sufficiently monitoring and managing executive performance. A good Chair knows when an overstretched director, who is not sufficiently contributing, should retire.

“Perceived director busyness reinforces the importance of the Chair’s role,” says Wyatt. “The Chair must use his or her judgement to determine if the director is adding enough value, and might conclude a director with multiple board roles is an asset for the board. The market cannot gauge director performance by looking at the number of board roles the director holds.”

Wyatt says director busyness is too often a focal point in underperforming organisations. “A busy board in a poorly performing company is an obvious target for investors. But the cause might not be multiple directorships: it could be an inappropriate mix of skills or other governance issues.”

Problems may arise with multiple directorships, says Wyatt, when directors are cosy with management or other directors. “There is a risk that directors are on so many boards that they form too many social ties with other directors and executives and can no longer exercise independent governance. It can be a warning sign when the same directors are on the same small circle of boards.”

Wyatt’s research found independent directors with multiple board roles in Australia are associated with a lower risk perception of those companies from investors, but only for larger companies.

Her 2013 paper, co-authored by Jonathan Christy, Zoltan Matolcsy and Anna Wright, said: “(our) finding does not support claims that directors with multiple directorships are overloaded and dysfunctional.”

Firm context is an important factor in assessing director busyness, says Wyatt. Smaller organisations benefit from directors who have fewer directorships and are more hands-on – a finding at odds with the paper by Ferris, Jayaraman and Liao. They found the benefits offered by busy directors are much more valuable to younger firms.

Wyatt says the US result could be because those busy directors are independent directors, and the busy independent directors are doing a great job monitoring and advising boards that are potentially conflicted by a dual CEO-Chair – with a dual CEO-Chair ultimately responsible for everything the company does.

Case for multiple board roles

Wyatt says larger Australian organisations benefit from directors who gain different industry perspectives across a range of board roles. “This diversity of experience can help directors see emerging trends and patterns across industry. They are better placed to help shape the organisation’s strategy or see potential threats.”

Being able to hold multiple directorships and develop a full-time governance career that is sufficiently professionally and financially rewarding are other considerations. Also, having fewer board roles could encourage more directors to assume quasi-management roles and spend greater time on each – a trend at odds with board/management separation.

It is also likely that multiple board roles makes directors more effective at governance. The experience of different board roles helps them work effectively with other directors, develop greater self-awareness and learn governance skills from a wider group of peers.

Wyatt says the key for stakeholders is to focus on the cause of firm underperformance, not rely on simplistic measures such as directorships. “A director with lots of board roles can add tremendous value to a board, just as other directors with lots of roles may be ineffective. What matters is that the chair is diligent and proactive in assessing performance issues that arise from director overload.”