With the current company reporting season in full swing I have been encouraged by the degree to which shareholders are becoming more vocal and less accepting of company boards decision making. Indicators are that we see a more frequent voting down of executive remuneration and the non-return of directors up for re-election.
This raises the obvious question as to why this trend is here and a call to relook at corporate governance issues, particularly at board structures. With the world economy stuttering and there being the real risk of recession, shareholders are looking increasingly at their appointed directors to guide the organisation through these troubled times. Exacerbating the economic woes are the geopolitical events that make doing business in a global market, that much more difficult. These geopolitical issues include threats of terrorism, tensions in the South China Sea and responses to dealing with climate change.
I believe that this has led to a relook at a board’s composition and a more fundamental questioning as to the number of directorships one should be allowed to be on. This has been debated over a number of years, and research has shown that, up until now, there is no direct correlation between a board director’s performance with the number of boards that individual sits on. However, the issue remains a hot topic for shareholders as seen by recent developments that have tried to curtail the number of boards that one can sit on. We see that Ireland requires that one should not have 25 directorships, India say 15 and Sebi, the Indian equivalent of the Australian Shareholders Association say that it should be no more than seven. The Australian Shareholders Association says that it should be no more than five and PriceWaterhouseCoopers says no more than three. So who is correct?
To answer this question, one needs to go back to the beginning and look at what the board’s role is. In simple terms the board is appointed to act as stewards of shareholder/investor funds and to act in their best interests to protect company value. As the AICD states, the board composition is a reflection of this status and as such needs to have the right group of people with the right background skills and experience. Furthermore, the addition of an individual to the board should build the collective capability and functioning of the board.
In order to fulfil this, many board nominations committees have an elaborate selection matrix that measures an individual’s ability to: manage risk, manage people, legal expertise, industry knowledge, etc. The selection would be seeking to gain the following benefits to the company, and these are:
- Access to key resources and funds
- Serve as leverage and communication channel to and from the external environment
- Enhance organisational legitimacy through reputation of board members.
What appears to be missing is a critical evaluation of the individual’s current directorships and the role these will play in their board performance. As we all know, requirements of each company differs depending on its size, nature and complexity – suggesting that one cannot be prescriptive as to the number of directorships held but this means we need more detail around them. The types of questions / details that should be looked at to determine whether a person has too many directorships, would include:
- Are they non-profit organsiations – as they may not have significant time requirements?
- Are any of the companies in financial stress? These would need time and energy on fixing the problem.
- Are they start-up companies – start-ups generally need more of a person’s available time?
- Are they global?
- What roles do they play – passive, active, committee participation, again looking at time availability?
- What is the potential for conflict of interest and impairment in sharing information?
- Has the market dynamics changed such that we need new and outside our industry thinking?
In conclusion, whilst it is difficult to assign a number of directorships that one should hold, I would suggest that some common sense prevails. If you are a director that is there to fulfil your obligations in terms of stewardship of a company and therefore actively engage in strategy and challenge/ evaluate management decision making, then it is not practicable to have too many directorships. By and large, the US and Australia have got it right and have informally set the standard with only about 5% of directors having more than three directorships. As a director of a company, the real question is whether you can do justice to your role if you have any more than three? After all, shareholders today see a turbulent operating environment and have a right to demand that they want their directors to make more time to charter a way through this.