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Proxy Advisors ISS and Glass Lewis: Director Overboarding in the Spotlight

It may shock you to know that in 1974, more than 90 directors served on 5 or more major corporate boards in the U.S. (from Who Killed the Inner Circle? The Decline of the American Corporate Interlock Network, Johan S.G. Chu & Gerald F. Davis.

Today the topic of director overboarding is commonly deliberated and focused on. For the uninitiated, director overboarding is the audacious term for directors who sit on too many corporate boards. What is regarded as too many is situation and person dependent of course but generally refers to the over commitment that makes it difficult to give each their full attention and dedication.

With the increasing skepticism surrounding a director’s capacity to effectively serve on multiple boards, the question is no longer if they can handle it but if they should be permitted to do so. For this reason, Institutional Shareholder Services (ISS) and Glass Lewis have implemented policies on director overboarding.

The ISS Policy is a bit more liberal in that it states that it will recommend against a director who is an active CEO if they sit on 2 public company boards aside from their own (so a total of 3 public company boards is considered acceptable). Glass Lewis puts this number at a grand total of two for CEOs and other executive officers of a company. For non-CEOs both Glass Lewis and ISS state that 5 public company boards is the maximum.

Interesting to note in these provisions is the lack of mention of private company boards. Since publicly listed companies are at near historic lows according to JP Morgan Asset Management (down 46% from its peak of 8,025 in 1996) private company boards may increasingly represent a more important component in one’s board portfolio. And undoubtedly, like their public company counterparts, these roles do take time.

For a director sitting on too many boards, there is the risk of not having enough time to focus on all of the responsibilities that these positions entail. They may not be able to be fully prepared for meetings. Furthermore if a crisis strikes the company, it may be “all hands on deck” as board responsibilities increase dramatically. The director with too many boards may not have the bandwidth to steer what can feel like the sinking Titanic away from the iceberg.

Even with directors insisting that they are entirely competent to serve on many boards, major shareholders may see otherwise. Shareholders are increasingly vocal about this and seek availability, devotion and commitment from all directors, all the time. They are questioning director’s capacity and availability like never before.

Despite the debate, there are still some institutions that postulate that businesses benefit most from directors who serve on various boards. According to the Wall Street Journal (11/20/15), The Society of Corporate Secretaries and Governance Professionals wrote a letter to ISS stating that “Imposing arbitrary limits on board service unnecessarily limits the pool of director candidates and increases the difficulty of finding and retaining the most effective directors.”

While these limits may make recruiting directors a bit more challenging, the improvement in corporate governance and ultimately company results is well worth the extra effort. Additionally, adding a director who does not have current or previous public company board experience can bring some fresh thinking that can advantage the entire board. As long as everyone is not of the same ilk.

At the end of the day, the role of a corporate board director is a challenging one, even when a company is flourishing. Care must be taken to ensure that one’s time and resources are available to adequately serve a company and its shareholders. There is nothing wrong with having some parameters in this regard.