Number of boards: A delicate balance
Wednesday, 20 June 2018
By Parmi Natesan and Prieur du Plessis
There are a number of factors to balance when considering the maximum number of boards on which a particular director should serve. Getting this right is more of an art than a science.
In the wake of corporate scandals, more emphasis has been placed on the non-executive director’s role. This role has certainly become more onerous and time-consuming: in America, the average time spent on a single directorship has gone from 210 hours per year per board (2008–09) to 248.2 hours (2015–16).
In addition, directors can incur liability for not fulfilling their duties adequately – again driving home the need for time to prepare adequately and really think through one’s contribution to each board.
Number of directorships
There are signs that institutional investors in particular are taking closer note of the number of boards on which directors serve. In the United States, Institutional Shareholder Services (ISS) and Glass Lewis, two influential proxy advisory services, are now abstaining from voting or voting against the appointment of directors who serve on more than five boards.
Research undertaken by the Henley Business School suggests the maximum number of board-level positions should be four. It’s a good rule of thumb, but we are wary of applying it blindly.
One individual with lots of commitments might be overloaded with one or two board positions, but a full-time non-executive director with lots of experience and flair might easily deliver value to five boards.
Flexibility is another point to consider when determining on how many boards an individual should serve. Directors, and particularly chairs or those who serve on certain board committees, like the audit committee, may need to have the time needed during a crisis – difficult if their board commitments are maximised.
The upside of multiple board positions
There is consensus among many companies, and board members themselves, that somebody who serves on more than one board is very likely to have an improved view of the business landscape and the role of the director. Experience on one board can positively impact performance on another, especially when it comes to spotting trends.
How deep is that pool?
There’s one peculiarly South African twist to the discussion about how many boards an individual can serve on: the question of diversity. The pool of competent directors in South Africa is relatively small, so the more boards an individual serves on could affect the diversity of directorship in general – at least if the majority of perceived experienced non-executive directors remain from the same traditional pool.
There are many initiatives afoot to increase the pool of competent non-executives, not the least being the IoDSA’s Chartered Director (SA) and Certified Director designations.
As board performance becomes more prominent, chairs are paying more attention to the workloads of their directors, and their own, in order to ensure the best quality of contribution possible. This is in line with the understanding that in order to discharge their fiduciary duties and protect themselves against liability, directors should have enough time to spend on adequately fulfilling their duties for each organisation on whose board they serve. In line with this, King IV now recommends consideration by the board of the number of other board positions its directors are allowed to hold, and transparent disclosure thereof.
Also, in terms of remuneration, the link between pay and time spent is becoming much tighter. All of these issues would feed back into a discussion about the director’s commitments and whether he or she has enough time to devote to the board in question.
As with much else in governance, judgement and transparency should ensure the right balance is struck between having enough time to do an increasingly demanding job, and gaining the depth of exposure to more than one company.
Parmi Natesan and Dr Prieur du Plessis are Executive Director: Centre for Corporate Governance and Chairman of the Institute of Directors (IoDSA) respectively.
Better Directors. Better Boards. Better Business