Zombie boards: spotlight on director tenure and overboarding

Research by Melior Investment Management shows that directors who serve on too many boards and have a long tenure decrease a company's economic performance and value.

A Melior Investment Management survey of the tenure of ASX 300 directors found that in 2020, almost 17 per cent had held their board seats for more than nine years, a figure highlighted by overseas studies as being the optimal tenure period for directors. The bulk of ASX directors had served between four and nine years

It cited the INSEAD Business School Zombie Boards study, which found that having a higher proportion of directors with tenure greater than 15 years “measurably decreased” a company’s value.

The data revealed almost half of the 146 companies in the ASX 300 have at least one director who sits on four or more publicly listed company boards — and that such “overboarding” was increasingly an issue, particularly in light of the growing demands placed on directors.

“Not only are the regulatory requirements imposed on directors becoming more onerous, they are having to deal with a broader range of issues such as ESG, as well as engage with different stakeholders,” said the company’s chief investment officer Tim King. “COVID-19 is a perfect example where boards had to quickly bring a new focus to issues such as human capital, risk management, company culture and business continuity. The concern is whether a director who is stretched too thin across too many publicly listed companies can meet all of those obligations effectively.”

The report cites a Harvard University study in 2019 that found companies with overboarded directors had inferior economic performance compared to companies with no overboarded directors. This comes as analysis of ASX 200 board composition by Open Director revealed the close nature of board networks. ASX 200 companies have a total of 1305 non-executive directors, but the total number of “unique” directors (counting a director once even if on multiple boards) is 1005.

King said Melior tended to vote against directors it considered to be over-extended, but stressed it was not a hard and fast rule, as the definition of commitment could vary greatly between directors based on individual capabilities and experience.

In 2020, Melior voted at 30 AGMs and considered 223 proposals, 86.4 per cent of which it voted in favour of management recommendations. Of the proposals it voted against, 20 per cent were based on concerns around board tenure and 16 per cent on issues relating to overboarded directors. A further 40 per cent were due to a lack of clear linkage between remuneration and ESG targets.