The Argument About Directors With A Lot Of Board Commitments

The Argument About Directors With A Lot Of Board Commitments

By Blair Morris

June 18, 2019

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How many outside board positions are too many?

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The asset manager Vanguard is taking a firm position on the issue of director overboarding. Its new proxy voting guidelines for U.S. portfolio companies essentially sets a limit on four directorships (and only one outside board for the CEO), in order to help address the demands of board and committee membership. In doing so, Vanguard makes a major contribution to the growing discussion about the impact of external commitments and distractions on director and CEO effectiveness.

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This is an issue that has its roots, to a large degree, in Sarbanes-Oxley era perceptions of how breakdowns in corporate governance contributed to the notorious scandals (thus prompting both the eponymous statute, and related corporate responsibility practices). Knowledgeable observers attributed some responsibility for those scandals to outside directors who failed to contribute sufficient time and attentiveness to their oversight obligations, in part due to the demands of other board service and similar commitments.

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Boards were thus encouraged to adopt policies that set forth expectations regarding director time commitments and the extent to which other factors (e.g., other board memberships, employment distractions, health considerations) could affect the quality of individual director service to the board. But no hard and fast limits arose from that environment.

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Nor do the most recently adopted governance principles compilations (e.g., The Business Roundtable, Commonsense Principles 2.0) recommend a numerical limitation on board service (or other activities in which the CEO or a director may engage apart from his/her duties). Rather, they focus more on the importance of director attentiveness and note that even the most time-constrained individuals may nevertheless add significant value to a board.

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More recently, proxy advisor companies such as ISS and Glass-Lewis have adopted guidelines that oppose the election of CEOs and directors who exceed specific thresholds on board commitment. However, these guidelines are flexible enough to consider any disclosed rationale for continued service on the board. Large fund managers such as Blackrock and U.K.’s LGIM will, similarly, consider voting against committee members and/or individual directors who serve on an excess number of boards, thus limiting his/her capacity to focus on each board’s requirements.

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Collectively, these guidelines and initiatives sharpen the debate on director overboarding. The ultimate focus is on the governance relationship between experience offered by holding multiple board positions and the engagement risks arising from being over-extended by board service and other distractions. Vanguard’s answer is to vote against (i) any director who is a named chief executive officer (NEO) and sits on more than one outside public board; and (ii) any director who serves on five or more public company boards.

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Limits on board service set forth in proxy voting guidelines do not constitute best practice, regardless of the numbers. Yet Vanguard’s action adds to the pressure for renewed boardroom conversation on outside board service limits (or for any limits on other activities a director may pursue outside of his or her board duties). In order to be truly effective, the conversation should include the possibility of expanding limits beyond public companies to the boards of large nonprofit charities such as health care systems and universities, which also carry substantial expectations of director commitment.

.

There’s no doubt that these will be difficult conversations. One consistent argument is that experience gained from multiple simultaneous board service positions enables the director to offer unique perspectives. Another argument is that specific limitations on board service are only one of many different elements of a director refreshment program, best applied at the discretion of the board. Additional opposition could arise from directors who may perceive a loss of personal prestige—and compensation—from a forced reduction in the number of boards they serve as a member.

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On the other hand, there is an increasing recognition—from data such as NACD surveys and other resources—that the commitment expected from directors has increased dramatically over the last several years. This trend is likely to continue, given the dramatic impact on board agendas of such developments as data/technology transformation, market consolidation and business disruption. In addition, there are some surveys that suggest that limits on outside board service results in superior organizational financial performance.

.

There is also the question of whether numerical limits would hinder, or advance, efforts to diversify boards (especially to the extent that many diverse candidates are often drawn from the ranks of large company boards). This is a question that must be considered by both sides to the overboarding debate, especially given the surprising results of the new Conference Board study. These results indicate that despite the demand for more diversity and refreshment, half of the Russell 3000 companies report no change in board composition.

.

Ultimately, the focus might not be on whether there should be a numerical limit, and if so whether that limit should be four, five or six other boards. Rather, the more important issues relate to expectations of engagement. That extends beyond mere matters of attentiveness, meeting attendance and participation in meetings, to the quality of a director’s oversight and assimilation of information, and his ability to be a meaningful and reliable resource to executive management.

.

Vanguard’s new proxy voting guidelines—building on the positions of other asset managers and proxy advisors—provide a legitimate opportunity to place the matter of overboarding on the agenda of the governance and nominating committee.

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The number of outdoors board positions are too numerous?

The possession supervisor Vanguard is taking a firm position on the concern of director overboarding. Its new proxy voting guidelines for U.S. portfolio business essentially sets a limitation on four directorships (and only one outside board for the CEO), in order to assist deal with the demands of board and committee subscription. In doing so, Lead makes a major contribution to the growing conversation about the impact of external dedications and interruptions on director and CEO effectiveness.

This is a problem that has its roots, to a large degree, in Sarbanes-Oxley era perceptions of how breakdowns in corporate governance added to the notorious scandals (hence triggering both the eponymous statute, and related business duty practices). Well-informed observers associated some obligation for those scandals to outside directors who stopped working to contribute sufficient time and attentiveness to their oversight commitments, in part due to the needs of other board service and comparable commitments.

Boards were hence motivated to embrace policies that set forth expectations regarding director time commitments and the extent to which other aspects (e.g., other board subscriptions, work interruptions, health factors to consider) could affect the quality of individual director service to the board. But no hard and quick limits occurred from that environment.

Nor do the most just recently adopted governance principles collections (e.g., Business Roundtable, Commonsense Principles 2.0) recommend a mathematical restriction on board service (or other activities in which the CEO or a director might engage apart from his/her responsibilities). Rather, they focus more on the importance of director attentiveness and note that even the most time-constrained individuals may nevertheless include substantial worth to a board.

More recently, proxy advisor business such as ISS and Glass-Lewis have adopted standards that oppose the election of CEOs and directors who go beyond specific limits on board commitment. However, these guidelines are flexible enough to think about any divulged rationale for ongoing service on the board. Large fund managers such as Blackrock and U.K.’s LGIM will, likewise, think about voting versus committee members and/or individual directors who serve on an excess number of boards, hence restricting his/her capacity to concentrate on each board’s requirements.

Jointly, these standards and initiatives sharpen the debate on director overboarding. The supreme focus is on the governance relationship in between experience used by holding several board positions and the engagement threats occurring from being over-extended by board service and other distractions. Lead’s response is to vote versus (i) any director who is a called chief executive officer (NEO) and sits on more than one outside public board; and (ii) any director who serves on 5 or more public business boards.

Limitations on board service stated in proxy voting standards do not make up finest practice, regardless of the numbers. Yet Vanguard’s action includes to the pressure for renewed conference room discussion on outside board service limitations (or for any limitations on other activities a director might pursue outside of his/her board tasks). In order to be genuinely efficient, the discussion must include the possibility of broadening limits beyond public companies to the boards of large nonprofit charities such as health care systems and universities, which likewise bring considerable expectations of director dedication.

There’s no doubt that these will be tough discussions. One consistent argument is that experience got from numerous synchronised board service positions allows the director to use special point of views. Another argument is that particular restrictions on board service are only one of lots of various elements of a director refreshment program, best used at the discretion of the board. Extra opposition might develop from directors who might view a loss of personal eminence– and payment– from a forced reduction in the variety of boards they work as a member.

On the other hand, there is an increasing recognition– from data such as NACD studies and other resources– that the dedication anticipated from directors has actually increased drastically over the last numerous years. This trend is likely to continue, offered the significant influence on board programs of such developments as data/technology transformation, market combination and business disturbance. In addition, there are some surveys that suggest that limits on outside board service leads to exceptional organizational financial efficiency.

There is likewise the concern of whether mathematical limits would impede, or advance, efforts to diversify boards (particularly to the extent that numerous varied prospects are typically drawn from the ranks of large business boards). This is a concern that needs to be thought about by both sides to the overboarding argument, specifically provided the surprising outcomes of the new Conference Board research study. These results indicate that regardless of the need for more variety and drink, half of the Russell 3000 business report no change in board composition.

Eventually, the focus may not be on whether there need to be a mathematical limit, and if so whether that limitation should be four, 5 or 6 other boards. Rather, the more crucial problems relate to expectations of engagement. That extends beyond mere matters of listening, meeting attendance and involvement in conferences, to the quality of a director’s oversight and assimilation of information, and his capability to be a significant and dependable resource to executive management.

Lead’s brand-new proxy voting guidelines– building on the positions of other possession managers and proxy consultants– supply a legitimate opportunity to position the matter of overboarding on the program of the governance and nominating committee.

” >

The number of outside board positions are a lot of?

The asset supervisor Lead is taking a company position on the problem of director overboarding. Its new proxy voting standards for U.S. portfolio business basically sets a limitation on four directorships (and only one outside board for the CEO), in order to assist deal with the demands of board and committee subscription. In doing so, Vanguard makes a significant contribution to the growing discussion about the effect of external commitments and diversions on director and CEO efficiency.

This is a concern that has its roots, to a large degree, in Sarbanes-Oxley age understandings of how breakdowns in business governance added to the notorious scandals (therefore triggering both the eponymous statute, and related business responsibility practices). Educated observers associated some duty for those scandals to outside directors who stopped working to contribute sufficient time and listening to their oversight commitments, in part due to the needs of other board service and comparable commitments.

Boards were hence encouraged to adopt policies that set forth expectations regarding director time commitments and the extent to which other factors (e.g., other board subscriptions, work interruptions, health considerations) might impact the quality of private director service to the board. But no set limitations arose from that environment.

Nor do the most recently adopted governance principles compilations (e.g., Business Roundtable, Commonsense Concepts 2.0) suggest a numerical restriction on board service (or other activities in which the CEO or a director may engage apart from his/her duties). Rather, they focus more on the importance of director attentiveness and note that even the most time-constrained individuals might nonetheless include substantial worth to a board.

More recently, proxy advisor companies such as ISS and Glass-Lewis have adopted guidelines that oppose the election of CEOs and directors who exceed particular limits on board commitment. Nevertheless, these standards are flexible sufficient to think about any disclosed reasoning for ongoing service on the board. Large fund managers such as Blackrock and U.K.’s LGIM will, likewise, consider voting versus committee members and/or individual directors who serve on an excess variety of boards, therefore restricting his/her capability to focus on each board’s requirements.

Collectively, these guidelines and efforts sharpen the debate on director overboarding. The ultimate focus is on the governance relationship between experience offered by holding multiple board positions and the engagement risks occurring from being over-extended by board service and other distractions. Vanguard’s response is to vote versus (i) any director who is a called ceo (NEO) and sits on more than one outdoors public board; and (ii) any director who serves on 5 or more public company boards.

Limitations on board service set forth in proxy voting guidelines do not constitute finest practice, regardless of the numbers. Yet Vanguard’s action includes to the pressure for restored conference room conversation on outside board service limitations (or for any limits on other activities a director may pursue outside of his or her board tasks). In order to be really effective, the conversation should include the possibility of expanding limitations beyond public companies to the boards of large nonprofit charities such as healthcare systems and universities, which also carry significant expectations of director commitment.

There’s no doubt that these will be tough conversations. One constant argument is that experience got from multiple synchronised board service positions allows the director to provide distinct point of views. Another argument is that specific limitations on board service are just one of several aspects of a director refreshment program, best applied at the discretion of the board. Additional opposition might develop from directors who may perceive a loss of individual prestige– and compensation– from a forced reduction in the number of boards they work as a member.

On the other hand, there is an increasing recognition– from data such as NACD surveys and other resources– that the dedication anticipated from directors has increased drastically over the last a number of years. This trend is most likely to continue, provided the significant effect on board agendas of such developments as data/technology transformation, market debt consolidation and business disturbance. In addition, there are some studies that recommend that limitations on outdoors board service leads to remarkable organizational financial efficiency.

There is likewise the concern of whether mathematical limitations would impede, or advance, efforts to diversify boards (particularly to the level that many diverse candidates are often drawn from the ranks of big business boards). This is a question that needs to be thought about by both sides to the overboarding debate, especially provided the surprising outcomes of the brand-new Conference Board study. These outcomes suggest that despite the demand for more variety and beverage, half of the Russell 3000 companies report no modification in board composition.

Eventually, the focus might not be on whether there ought to be a mathematical limitation, and if so whether that limitation needs to be four, five or six other boards. Rather, the more crucial issues associate with expectations of engagement. That extends beyond mere matters of attentiveness, meeting participation and participation in conferences, to the quality of a director’s oversight and assimilation of info, and his ability to be a meaningful and reliable resource to executive management.

Vanguard’s new proxy ballot guidelines– structure on the positions of other asset managers and proxy advisors– offer a genuine chance to place the matter of overboarding on the program of the governance and nominating committee.

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