Deborah Page AM FAICD is used to juggling a busy board portfolio. Over a long governance career, she has typically served on four corporate boards and a not-for-profit at once. Page says these multiple directorships have expanded her board skills and experience by exposing her to diverse issues. It has also built her director intuition.
“As the chair of audit and risk-management committees, I get exposure to different audit firms and consultants, different management and financial reporting, and different approaches to risk-management frameworks and risk-appetite statements,” she says. “What I glean from one corporate’s issues or emerging trends puts me on notice for others. My work with a technology company, for example, assists my input into tech developments and challenges across other roles.”
Page is a non-executive director of investment managers Pendal Group, the financial technology specialist GBST Holdings, network services supplier Service Stream and building materials producer Brickworks. She also chairs their audit and risk committees.
If Australia follows international trends, market pressure or regulation may see non-executive directors holding fewer board seats.
The trend towards directors holding fewer roles is well established. The majority of directors of ASX 200 companies do not hold a second board position at a company on the index, according to AICD data from the end of March this year. Of the 1193 directors of Australia’s largest listed companies, only 230 held another ASX 200 role with the average number of board positions standing at 1.26.
Corporate crises overseas and in Australia’s financial services sector have reignited the debate on director “overboarding”, a term used to describe directors who have too many roles. As governance workloads increase, investors need to know directors have enough “flex time” for unexpected events.
Although there is actually no prescribed limit, a maximum of three to four board roles (in larger listed companies) or two chairmanships seems to be the current market expectation.
“The workload required for any board position will vary depending on the organisation and its complexity, and may change over time with circumstances. It is incumbent on each individual director to decide whether they have sufficient time to devote to a role — whether they hold one or several — to fulfil their duties and responsibilities,” said Louise Petschler, AICD General Manager Advocacy.
Proxy advisory groups have guidelines that assess director workloads on the number of board roles, but they are problematic because they do not consider each role’s complexity or a director’s skill, experience and capacity to serve on multiple boards. Page describes blanket guidelines on director workloads as “absolutely too simplistic and, frankly, insulting”.
This lack of detail has led Diane Smith-Gander FAICD, a Wesfarmers and AGL Energy non-executive director, to raise the idea of introducing a points system to assess board workloads (such a system operates in The Netherlands).
Smith-Gander told the AICD Governance Leadership Centre in June, “The problem with current guidelines on overboarding is they are based on raw numbers. A more nuanced points system could account for differences in the complexity and workload of different board roles across sectors and include any executive-style work.”
Such a system weighs directorships by size and complexity. It would provide an opportunity for directors to talk to the chair about their points profile and help investors compare board workloads across companies. However, others say a points system would be tough to enforce and not resolve workload ambiguity, arguing the current system, which relies on the board’s chair using their judgement to identify overstretched directors, is adequate.
The problem is that both boards and investors tend to be reactive on director workloads. A proxy advisory firm, for example, might single out the board of an underperforming firm and express concerns about overboarding, typically behind closed doors. However, it is not until there is a performance issue or a crisis that the issue flares.
Ed John, ACSI’s executive manager, governance engagement and policy, says institutional investors want to know directors have enough time if a crisis emerges. “A director who has several listed-company board roles might be doing a good job, but what would happen if a major issue struck at one or more of those companies? Would he or she have capacity to spend a lot more time on each role?”
ACSI only recommends against the re-election of directors where performance issues arise, he says. “When it’s clear the board has missed key issues, we examine director workloads. That said, the director community generally has been reducing the number of board seats held, on average, and listening to market concerns on this issue.”
The risk of director overboarding is clearly on the minds of researchers and regulators, as well as investors. In 2017, US researchers Stephen Ferris, Narayanan Jayaraman and Stella Liao found that 70 per cent of worldwide firms in their study had “busy directors” and that the corporate world viewed such directors as “ineffective”. Their Georgia Tech research paper — Better Directors or Distracted Directors? An International Analysis of Busy Boards — identified that firms with busy directors had reduced profitability and their boards tended to add less value.
Jeremy Kress, who lectures in business law at the University of Michigan, argues that busy directors could cause the next global financial crisis. He says the drawbacks of director busyness are most severe for boards of large financial services organisations. His research, Board to Death: How Busy Directors Could Cause the Next Financial Crisis, published this year in the Boston College Law Review, shows directors with many outside commitments are less inclined to participate actively in corporate decision-making, less likely to challenge management, and likelier to miss board and committee meetings.
Kress wants US proxy advisory firms to implement stricter overboarding thresholds for directors and for US regulators to model director workload rules on European Union reforms that limit outside employment and board seats for financial services directors.
Martin Lawrence, of proxy advisory Ownership Matters, believes the Australian Prudential Regulatory Authority (APRA) could introduce similar directorship limits in financial services. “I suspect we are not far from having such a rule for boards and APRA-regulated entities.”
Nature of governance
The issue of overboarding is about more than directors having enough time to fulfil their duties and earn their fees. The debate strikes at the heart of governance.
In the UK, the recently released Corporate Governance Code states that full-time executive directors should not take on more than one non-executive director appointment in a FTSE 100 company or other significant appointment.
APRA’s April 2018 report on its prudential inquiry into the Commonwealth Bank (CBA) has heightened fears that boards are being pushed towards a quasi-management role. The report made it clear that Australia’s financial services regulator expects boards to dig deeper in organisations. It implies that boards should have more of a hands-on role, but that’s something boards of large organisations may want to avoid. A blurred line between management and directorship can distract the executive team and reduce board effectiveness and independence.
There are other issues, too. Would directors holding fewer roles, and spending more time on each, hurt independence? Should directors be paid more if they must hold fewer roles? Would the talent pool of experienced directors shrink if they had to hold fewer roles and have less access to the intellectual, career and financial benefits that multiple directorships provide? And is the push for directors to hold fewer board seats simply ill-judged in this era of digital disruption? As industry boundaries blur, having directors who govern across sectors and can join the dots on trends is vital.
Page says the market should allow directors to use their judgement on workloads. In her 16-year governance career, Page has volunteered for dozens of not-for-profit committees and associations in addition to her corporate boards. Yet she still built a reputation for being one of Australia’s most effective directors. The issue, she says, rests on a director’s organisational skills. “Most directors are capable of weighing up all the likely demands, including travel, which each board involves and deciding what level of flex time they need.
Key attributes of a good director are as basic as being committed and well organised. A disorganised director who serves on lots of boards is one who will get into strife.”
Lawrence puts it bluntly. “I’ve met directors who have four big board roles and, year after year, are across the detail and appear to make a strong contribution. I’ve met others where one board role is one too many. It comes back to a director’s commitment and skill,” he says. “The market should be grown-up on the issue and accept that we appoint senior people to boards and that we should let them decide on their workload.”
“Directorship is a serious role and people who take it on tend to be serious, responsible people who do the work. To suggest experienced directors cannot be across multiple boards and issues at the same time is patronising.” Peter Hay FAICD
Managing multiple board roles
Peter Hay FAICD has held numerous board roles in a distinguished governance career. He chairs Newcrest Mining and shopping centre specialist Vicinity Centres, both ASX 100 companies. Describing the push for directors to hold fewer roles as “nanny state stuff”, Hay says, “I’ve regularly served on four boards at a time and sometimes served on committees on all of them,” Hay says. “It’s entirely feasible for directors to have four corporate board roles and a few smaller not-for-profit roles — and still have enough spare time if they have to govern in a crisis.”
A non-executive director with four board roles on ASX-listed companies might spend 40-plus days on each in a year, although there is no hard rule. That leaves time if the director needs extra days to govern in a crisis, provided he or she is not loaded up with executive or other roles.
Over 30 years of serving on boards, Hay recalls only a few occasions where he thought a fellow director was not pulling their weight. “Directorship is a serious role and people who take it on tend to be serious, responsible people who do the work.”
A former CEO of law firm Herbert Smith Freehills, Hay scoffs at suggestions that directors who have multiple board roles lack time to govern in a crisis. “As a mergers and acquisitions lawyer, I regularly worked on two or three big deals at once. To suggest experienced directors cannot be across multiple boards and issues at the same time is patronising.”
Investors risk being distracted by simplistic director-workload metrics, he says.
“On a board, all directors have a strong interest in ensuring there are no passengers. That’s by far the best regulating mechanism for director workloads. While it is legitimate for investors to ask questions about workload, the questions should recognise that boards self-regulate pretty well on this. A good chair quickly knows if a director is not putting in.”
Hay has reservations about corporate executives serving on boards of companies in unrelated industries — an emerging trend in the past decade as boards encouraged the CEO and/or CFO to gain governance experience. “If you are the CEO of a large listed company, I can’t see how you can find time for 40 or so days for a non-executive directorship.”
Nora Scheinkestel FAICD is another of Australia’s most experienced directors and has served on more than two dozen boards over 25 years. She is chair of toll-road developer Atlas Arteria and a non-executive director of Telstra Corporation, energy company AusNet Services and OceanaGold Corporation.
“Directors have to use their judgement as their capacity for work will differ with individual attributes and life circumstances,” says Scheinkestel. “You do, however, need enough flex time in the diary when things go pear-shaped so you have capacity to scale up involvement. Serving on multiple boards makes me a better director. You get breadth of experience and see issues in a different context that helps you with breakthrough thinking. Why should people at the prime of their career idle along in second gear? While a portfolio of non-executive director roles pales into insignificance compared to a senior executive’s salary, directors want a portfolio that equates to a reasonable income for the work and liability attached.”
Peter Hearl FAICD, a director of Santos and Telstra, says it all comes down to time and attention that directors can pay to companies. “Not all companies are equal — some are complex, international — it’s going to vary. The liabilities placed on directors these days, whatever company you are involved with, you really have to make sure that you are committed 110 per cent in time and energy.”
“I’m seeing directors spending more time reflecting on governance issues, challenging assumptions…” Launa Inman MAICD
Launa Inman MAICD is a non-executive director of Super Retail Group (BCF, Macpac, Rebel and Supercheap Auto) and commercial real estate developer Precinct Properties New Zealand, and a former Commonwealth Bank director. She says board workloads could increase after APRA’s report on CBA and the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. “Most boards I am familiar with already work very hard,” Inman says. “But I’m seeing directors generally spending more time reflecting on governance issues, challenging assumptions and questioning whether they have missed anything.”
She says the market needs to assess the size and challenge of each board role rather than rely on one-size-fits-all guidelines from proxy advisors. “There’s no doubt that directorships in the financial services sector, for example, have become more complex in the past few years and have higher workloads due to additional regulatory focus,” she says.
Global proxy advisor Institutional Shareholder Services adopted a policy last year that lowers limits on multiple directors from six board seats to five. In addition, many US S&P 500 companies have restrictions on the number of board seats directors can hold. Although effective in reducing directorships (the average number held in the US has fallen to around three), the guidelines are a blunt tool. A director who governs two underperforming companies might be busier than another with four board roles. A director with decades of experience might eat multiple board roles for breakfast; an emerging director new to an organisation and its industry might have less capacity, but there is no allowance for these differences in guidelines.
Investors have scant data to assess director workloads. Listed companies disclose ASX directorships in annual reports. However, directors may hold other undisclosed but time-consuming not-for-profit directorships, consulting roles or academic positions.
The proposed new ASX Corporate Governance Council’s Corporate Governance Principles & Recommendations go some way to address this issue. If adopted, the guidelines would tighten the need for directors to “seek existing entity approval before accepting any new role that could impact upon time commitment expected of the director.” [Recommendation 1.3]
The emphasis on “new role” would require directors to discuss with the chair how they would manage the extra workload and give chairs an opportunity to tell directors if another role would affect their current duties.
Disclosure of director effort is also problematic. The guidelines recommend ASX-listed companies disclose director attendance at board and committee meetings. That gives no indication of how many off-cycle board meetings directors attended, how many company sites they visited or other tasks completed.
The market is right to be vigilant on the risk of overboarding. Equally, the governance community is right to push back against moves to limit roles. Directors say only they, their chair and fellow directors can truly assess workloads and effort, and that boards should continue to self-regulate on this issue. But in a jittery market, investors want evidence rather than anecdotes.
Tony Featherstone is consulting editor of the AICD Governance Leadership Centre.