Picture this: a non-executive director serves on the board of three ASX 100 companies. She also chairs a not-for-profit board and serves on a government advisory board. In between board duties, she does a few small consulting projects.
The devoted director is well-regarded for her board contributions. With a full board portfolio, her professional life is busy, although less so compared to the previous CEO role.
Until crisis strikes. The director’s first ASX 100 company receives a hostile takeover bid. The second needs an emergency capital raising as new entrants disrupt its market.
Meanwhile, the charity is under daily attack in newspapers over allegations of financial impropriety.
Each directorship is suddenly a full-time job. But the director has five board roles to juggle and none can monopolise her time. In hindsight, the director is too stretched and stakeholders could suffer from her busyness.
The concept of director busyness has been in focus for at least a decade. The investment community has pushed for directors to hold fewer board seats and devote more time to each. A director serving on more than three ASX 100 boards is rare.
Professor Jeremy Kress, of the University of Michigan, argues that that director busyness could cause the next financial crisis. He wrote about his paper in July 2017 for the Harvard Law Forum on Corporate Governance and Financial Regulation.
He says the drawbacks of director busyness are ‘especially severe for large, complex financial institutions because of the unique governance demands imposed on their boards’. Director busyness can inhibit management oversight and increase the risk of firm failure.
Kress says directors who have too many commitments are less inclined to participate actively in corporate decision-making. They are likelier to miss board meetings and board sub-committees that have busy directors tend to meet less often.
Also, overly busy directors tend not to challenge management, argues Kress. “Busy directors are more susceptible to managerial self-dealing, misconduct, and excessive risk-taking.”
Moreover, when an organisation is in a crisis, the busy director devotes most of their time to that role. “The director, in turn, neglects his or her other board memberships,” says Kress.
Kress recommends that proxy firms adopt stricter ‘overboarding’ standards for directors of large, complex financial institutions. The two largest proxy advisory firms, ISS and Glass Lewis, this year recommended that shareholders in the United States vote against any director who serves on the board of six or more public companies - thresholds that are high by Australian standards.
Kress also recommends financial regulators implement policies to limit director overcommitment in the banking sector. In their risk-assessment processes, regulators could downgrade financial organisations that have overcommitted boards.
Commenting on US financial institutions, Kress argued: “The US Federal Reserve should begin assigning an unsatisfactory risk management rating to a company if, in the Federal Reserve’s supervisory discretion, the company’s directors are too busy to execute their governance roles effectively.” It’s a view that Australia’s financial-sector regulator, the Australian Prudential Regulation Authority (APRA), might consider.
Kress also calls for targeted regulatory intervention in cases of board overcommitment. Here, regulators enforce a cap on directors’ outside commitments, to disqualify extraordinary busy candidates from governing large, complex financial companies.
Sensibly, Kress calls for higher board compensation if regulators require directors to serve on fewer boards. He says: “Director candidates already complain that serving on a financial company’s board is unattractive due to onerous regulations and potential liability. Imposing limits on directors’ outside commitments is likely to further dissuade well-qualified candidates from serving.”
Arguments for and against multiple directorships
Kress’ argument intuitively makes sense. Board roles, in large and small companies, across sectors, have become more demanding. As governance complexity increases, it makes sense for directors to hold fewer board roles and devote more time to each.
Also, requiring directors to hold fewer board seats creates opportunities for new directors to serve, thus potentially increasing the diversity and depth of Australia’s governance talent pool. A longstanding criticism is the same long-established directors monopolising board positions in large listed companies.
The counter-argument is that multiple directorships improve governance. Directors are exposed to more industries, companies, trends, people and experience. Holding board positions across sectors helps directors see patterns that executives, focussed mostly on one industry and organisation, can miss.
Moreover, the prospect of multiple directorships – and a governance ‘portfolio’ career - can attract emerging directors who transition from senior executive roles. They pursue directorship as much for the variety and professional stimulation, as for the fees. Holding one or two directorships, in a half-time capacity, feels like an executive role.
Multiple directorships are also important for those who rely on board fees as their primary income source. Directorship is arguably not well paid relative to the time, complexity and financial, legal and reputational risks. Directors typically earn several times less than executive salaries on a pro-rata basis.
Another argument is that the market should judge director overcommitment, not regulators that rely on blanket formulas. A highly-experienced director with four ASX 100 boards might do a stellar job on each.
Also, the only people who truly know whether director overcommitment is affecting performance are other directors. Chairmen who sense a director is too stretched can point that out and, if action is not taken, suggest the individual retires from the board.
Australian boards reducing overcommitment
Detractors of Kress’ argument will note that Australia’s governance community has done a good job in reducing overcommitment levels.
Only four directors held four board seats in ASX 200 companies in 2016, according to latest ACSI research. Two directors held five board seats. Across all ASX 200 companies, 182 people held 418 seats – or just over a third of non-executive directorships.
That suggests a small group of directors holding slightly more than two board seats on average – a finding that seems appropriate for complexities of ASX 200 governance.
Those pushing for Australian directors to hold even fewer board positions, and treat each more like a quasi executive role in terms of workload, might underestimate progress on this issue and the benefits of multiple board roles.
Kress has a point that large, complex financial institutions require directors with fewer commitments. Examination of the professional commitments of directors of Australia’s major financial institutions is needed to shed further light on this issue.
Details for the full research paper:
“Board to Death: How Busy Directors could cause the next financial crisis” Jeremy C. Kress, University of Michigan, Ross School of Business Working Paper No. 1370