by Cydney Posner
Companies are paying increased attention to the potential for director “overboarding,” according to the WSJ. Many companies have adopted restrictions on the number of outside seats that directors may hold, often in response to shareholder requests. In addition, some institutional shareholders are guided in their voting by internal limitations on the number of board seats, and the major proxy advisory firms have also tightened board seat limitations in the criteria they use to evaluate board members.
According to a WSJ analysis, at companies included in the S&P 500, in 2015, less than 5% of directors held four or more board seats, compared to 27% a decade earlier. The article also reports that only five people held six or more board seats in 2015, a substantial reduction from the 308 reported in 2005. In addition, the article reports, approximately 77% of S&P 500 companies impose a limitation on the number of permitted outside directorships, an increase from 71% in 2010 (based on data from Spencer Stuart, an executive search firm). Of those, 20% impose a three-seat limit, up from 16% in 2010.
Several major institutional shareholders, including CalSTRS, will oppose the re-election of directors serving on more than four boards. This year, both ISS and Glass Lewis reduced their thresholds for “overboarding” that will trigger a negative vote recommendation for directors who are not CEOs (and for GL, not executive officers) of public companies. Under the new policies, both of which are subject to a one-year transition period, ISS and GL will recommend withholding votes from non-CEO/non-executive officer directors who serve on more than five public company boards, a reduction from the previous threshold of six seats. For directors who are also CEOs or executive officers of public companies, the thresholds are even lower.
In addition to increased investor scrutiny, the renewed attention is also largely attributable to heavier board workloads in recent years. The article reports that directors at public companies spend an average of 248 hours a year for each board served, up from nearly 191 hours in 2005, according to surveys by the National Association of Corporate Directors. The WSJ asked a director holding board seats at five large companies (including one position as chair and three comp committee assignments) to keep a diary of the director’s activities. The director recorded performing “board duties on 30 of the 33 days monitored, including most weekends. On Oct. 9, this person left New York at 6:30 a.m. to fly to Boston and confer with two major shareholders. A different day, the director attended a 12-hour board meeting for another company.” Some directors are able to juggle several board seats only because not all of their companies have calendar-year fiscal years. (See this PubCo post for comments from SEC Chair White and other members of the SEC accounting staff regarding audit committee overload and this PubCo post discussing a KPMG survey reflecting concerns regarding audit committee overload.)
According to one commentator, “more boards have balked at prospective directors with three seats because ‘they don’t really want to be somebody’s fourth….Boards want to ensure that the new director will have the time….They also are concerned about the optics of a too-busy member.’’’