How Much is Too Much? Major Misconceptions About Overboarding

The question of how many board director roles is too many is often deliberated and debated. Institutional investors and proxy advisory firms have policies about how many boards a director should serve on simultaneously. They will vote against a director they deem to be overboarded. For example, in the 2020-2021 proxy year, Blackrock voted against 758 directors at 639 unique companies for what they termed “overcommitments,” aka over-boarding.1

In the past twenty years or so, the role of the board director has become increasingly complex and demanding. Various corporate implosions and the regulations that followed have led to expanded responsibility and liability. Expectations have increased as the board of directors has moved (hopefully) beyond the ceremonial to the strategic.

But why the debate about capacity? By definition, board directors are highly accomplished and very experienced, so surely, they know how many board roles they can reasonably take on. True. But it is also true that board roles are highly desirable and prestigious and can be quite financially lucrative. Additionally, the very human tendency to overestimate ourselves should not be overlooked.

So, the issue will remain a point of contention for those focused on best governance practices challenging those they feel have overextended themselves by serving on too many boards. There is, however, a critically important and critical variable that needs to be brought into the debate and discussion.

Investors and proxy advisors focus on public company board directorships. Their policies dictate the prescribed number of public company boards that are appropriate. They do make the distinction between an executive who is an active CEO versus those who are “retired” from their day jobs. For example, Institutional Shareholder Services (ISS) states that three is the maximum number of public company board roles a public company CEO can have. For someone who is not a public company CEO or Executive Officer, this number can be five. Anything above these numbers is considered overboarding, and a negative vote for the director is recommended.2

These policies are crucial for the reasons mentioned above. Although different institutional investors and proxy advisors have slightly different recommendations, overall, they put a standard measurement in place that helps take some of the subjectivity out of the overcommitment question.

So, what is missing in all these well-thought-through policies and prescriptions? The discussion, debate, recommendations, and voting all involve public company boards. Private company boards are not included in the count.

In the US, it is estimated that about 1% of companies are public. Of the millions of private companies, most are too small to have boards, but there are undoubtedly thousands that not only have boards of directors but also follow good governance best practices. They have strategic and hard-working boards that are committed and meet regularly, just like their public company counterparts.

These boards represent serious and significant undertakings. Take, for example, a small venture start-up that consists of investors and an independent expert or two. These boards are often called upon far more frequently and asked to delve more deeply than well-ordered public companies. And what about large private companies like Cargill, with revenues of over $100 billion, or Mars Inc., the global confectionary and food company? Their directors certainly sit on board committees and work hard to ensure the continued success of these global behemoths. Another example of the prototypical private company board is that of a private equity portfolio company. Like the early-stage venture company board, a PE portfolio company board is comprised of several investors and, in many cases, several independents. The pace within these boards and the companies they serve is fast and deliberate. Not unlike the average public company.

With all of the variations of boards, why, then, are only those that are publicly traded considered when determining overboarding? To omit private company boards is to miss the entire picture. If institutional investors and proxy advisors care about how committed a director will be based on their other responsibilities, they should look at the whole spectrum of commitments. At the very least, this must include private company boards. Truth be told, advisory boards and non-profits can also be demanding and put limits on the time a Director has available to serve, but that can be part of the next round of improvements.

1-????https://www.blackrock.com/corporate/literature/publication/2021-voting-spotlight-full-report.pdf

2-????https://www.sidley.com/-/media/update-pdfs/2021/10/20211026-roundup-of-director-overboarding-policies.pdf?la=en

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