Author: Rehana Cassim, Professor in Company Law, University of South Africa
Original article: https://theconversation.com/directors-need-limits-to-how-many-boards-they-sit-on-stretching-their-time-too-thinly-is-risky-197226
Experienced directors of companies are in high demand in countries around the world. For this reason, many hold multiple directorships.
There’s an upside to this. Directors with multiple directorships are able to gain more knowledge, experience and access to social networks and resources, thus adding more value to the company.
But there’s also a downside. When directors sit on too many company boards they might become what’s referred to as ‘overboarded’.
When directors serve on an excessive number of boards, they run the risk of not having the time or capacity to contribute effectively to the work of each board.
Last year, shareholders voted against the re-election of Twitter director Egon Durban because they thought he held too many board seats. He was a director on seven public company boards at the time. Twitter kept him on after he agreed to reduce his board seats to five. Durban lost his board position in any event after Elon Musk took over the company and dissolved the board a few months later.
Overboardedness should be assessed on a case-by-case basis. This is because directors’ experience, capabilities, knowledge and commitment varies from one individual to another. But there should be some limits to the number of boards a director serves because if they are overextended they put themselves and the companies they serve at risk.
The problem with overboarding
A company’s business and affairs are managed by its board of directors.
Directors are fiduciaries to their company. This means they must act in good faith, with honesty and loyalty, and in the company’s best interests. They must not put themselves in a position where their personal interests conflict with their duties to the company. The effectiveness of the board is key to a company’s success.
The responsibility of boards worldwide has increased significantly in recent years. Some reasons for this are increasing shareholder activism and more corporate governance as well as regulatory requirements. In addition, there’s the escalating need for cybersecurity as well as a global energy crisis which is destabilising companies.
The challenge with serving on too many boards is that directors can’t attend sufficient board meetings or properly oversee the boards they serve. This carries risks for the board member and the company.
If directors breach their fiduciary duties, they can be held personally liable for loss suffered by the company as a result of the breach. They can also be declared delinquent, which in South Africa will disqualify them from holding office as a director for seven years or longer.
These risks are higher in public listed companies, which demand much more from directors.
Serving on too many boards can also cause complicated conflicts of interest for directors, especially when they serve on the boards of competing companies.
How many board seats is too many?
Since board duties differ depending on the type of company, its size, and the complexity of the industry, it is difficult to place a hard limit on the number of board seats that directors may hold.
For example, an executive director (a full-time director and employee of the company) with two additional directorships of listed companies may be overboarded, but an experienced non-executive director (a part-time director who is not an employee of the company) of two listed companies, a private company and a non-profit company, may be able to properly fulfil his or her board duties easily.
Institutional investors have started paying closer attention to the number of boards on which directors serve. In the US, institutional investors have opposed the election of directors who serve on more than five boards. For example, investment manager BlackRock recently voted against 163 directors at 149 companies on the basis of overboarding.
In the UK, institutional investors regard a director holding more than five seats as overboarded, where a position as a board chair counts as two seats and a position as an executive director counts as three seats.
In developed markets, investors generally regard four or five directorships as the maximum number of permissible directorships, but in markets where multiple directorships are more common the limits are higher. For example, the India Companies Act 2013 limits the number of directorships to 20, while the maximum number of public company directorships is capped at ten. But this number may be reduced by the shareholders.
South Africa has no clear guidelines on the issue. This is a problem given that it has a small pool of eligible board candidates with the necessary skills, especially in specialised industries.
The country’s King IV Report on Corporate Governance recommends that potential non-executive directors give the board details of their other board positions, and written statements confirming they have enough time to fulfil their board responsibilities.
What should boards do to avoid overboarding?
Before appointing a director, the board or its nomination committee, should consider the number of other directorships held by the director on listed and unlisted companies. It should also consider the director’s experience and ability to manage his or her duties.
Boards must take into account whether directors serve on the boards of competing companies and whether potential conflicts of interests can be properly managed.
Transparent disclosure is key to making sure that directors are not overboarded. Directors must disclose details of their other directorships and board committees on which they serve. Directors should also disclose any new directorships they accept during their tenure on the board.
Board evaluations should focus on whether individual directors are overboarded, so that steps may be taken to manage this. Companies should also devise their own policies on overboarding.
Finally, before accepting new appointments, directors are advised to carefully consider their increased risk of liability if they neglect their duties due to being overextended. They should avoid accepting more directorships than they can handle.