While a number of investors still look to the proxy advisory firms for guidance on director overboarding, an increasing number now apply their own limits. Investors that do not follow proxy advisor recommendations have often adopted their own approach to evaluating board commitments as part of an overall trend we’re observing where investors are focusing on board composition and efficacy.
Updates to Director Overboarding Limits
Citing an “explosion” in the time commitment needed for board service, both Institutional Shareholder Services, Inc. (ISS) and Glass Lewis & Co. (Glass Lewis) have reduced their overboarding limits in the last two years. Concerns regarding the time commitment needed for board service have progressively increased among governance advisors, institutional investors, and boards themselves.
ISS will generally recommend voting against or withholding votes from directors who serve on more than five public company boards, or serve as the CEO of a public company while serving on the boards of more than two public companies besides their own (i.e., three or more total boards). Glass Lewis has a similar policy, except that if a director is an executive officer of a public company (not just a CEO), the firm wants the director to limit outside board service to two boards in total (including his or her own if they serve on the board).
With certain exceptions, ISS will recommend that shareholders oppose the election of an overboarded director nominee. Glass Lewis, in contrast, may consider other “relevant factors” such as whether there is a “sufficient rationale” in determining whether to support or withhold support.
Investors Concerned With Risk, Negative Returns as a Result of Overextended Directors
The recent updates to director overboarding policies come as board members report a notable expansion of their time commitment as directors over the last decade. Their average time commitment has increased nearly 30%, from 191 hours in 2005 to 245 hours in 2016, according to the National Association of Corporate Directors.
Figure 1
Source: National Association of Corporate Directors
Many investors cite concerns that overextended directors lack time to adequately monitor management, potentially increasing risk and negatively impacting returns. Accordingly, they have adopted their own proxy voting policies that are more stringent than those of the proxy advisors.
For example, BlackRock and J.P. Morgan Chase & Co. oppose directors serving on more than four public company boards, or CEO directors serving on more than two public company boards in addition to his or her own.
In light of the updated policies of significant institutional investors, and the greatly increased time commitment required of corporate directors, companies would benefit from understanding the overboarding policies of their investors, ISS and Glass Lewis, and how such policies might apply to their executives. Even if the revised policies as applied to a company’s officers might raise the concerns of shareholders, engaging with investors and a proactive disclosure approach can help to mitigate overboarding issues.
If you are interested in understanding CEO board membership or overboarding among your peers, Compensation and Governance Professional’s (CG Pro’s) Board Demographics report has this information, or if you have questions about director overboarding policies and want to speak with one of our consultants, please click here to contact us.
