One of the primary aims of every corporate governance system is to make boards effective in terms of their advisory and monitoring roles. As a result, a lot of thought has been put into identifying the characteristics that improve board efficiency.
Even though some elements, such as gender and ethnic diversity, receive substantial attention, others are typically only discussed in specialist fora and do not attract sufficient coverage by mainstream media, or get debated by policy makers and asset managers. Director busyness is one of them; the lack of attention to this issue is surprising given the prevalence of academic research findings suggesting its potentially destructive effects.
Directors who hold board seats on multiple firms are typically associated with greater skills and expertise. After all, the fact that multiple firms vie for their advice should be an indication of significant ability and superior knowhow. At the same time, directors who hold multiple seats act as a conduit of important information across firms, enabling the fast adoption of best business practices and innovations within and across industries.
While busy directors can play to firms’ advantage, according to academic work, they are on average detrimental to board monitoring quality and shareholder value. Having busy directors on a firm’s board is associated with lower operating performance, weaker profitability and low acquisition performance.
Firms with busy boards are less likely to fire underperforming CEOs and typically award higher executive pay. The main explanation put forward by academic research is that busy directors have insufficient time to devote to discharging their duties at each firm. Despite the overwhelming evidence against busy boards, UK policy makers still don’t appear to set their sights on the issue.
The latest iteration of the UK Corporate Governance Code (2018) consists of 18 principles and 41 provisions. Yet, the only reference made to director busyness is in principle H, which suggests that non-executive directors should have "sufficient" time to meet their board responsibilities. This is then clarified in provision 15, which asks that boards take into account other demands on directors’ time during their initial appointment and before approving additional external appointments.
The only binding constraint comes in the form of a restriction to full-time executive directors on taking more than one non-executive directorship in a FTSE 100 company or any other significant appointment. But there is no constraint on "professional" non-executive directors who hold numerous independent positions, nor is there any indication of what constitutes "other significant appointment" for full-time executive directors.
In July 2018, the Financial Reporting Council published its "Guidance on Board Effectiveness" to accompany the Code. Out of 134 suggestions to corporate boards only one (no 95) makes reference to "overboarding" and invites nomination committees to consider setting limits to the number and scale of other director appointments.
Is the UK approach on this important issue too lax? As a big proponent of the UK’s emphasis on promoting good practice and its comply-or-explain approach to corporate governance, I am afraid our failure to make issues regarding board busyness more prominent and offer more visible and structured policy advice might send the wrong signal to corporate boards regarding their importance.
Our friends across the pond typically prefer more market-based solutions to such issues. Proxy advisors, such as the Institutional Shareholder Services Inc. (ISS), are very active and prescriptive in suggesting the acceptable number of directorships for the average board member of US firms. Given that the same leading proxy advisors also operate in the UK, it is no surprise that we’re gradually observing the same prescriptive approach developing here.
We should have an informed debate in this country on whether a market-based solution or a more proactive policy intervention to curb board busyness is the best way forward. We also need to consider the firm disclosure requirements for busy directors.
A potential scoring system for directors and boards in terms of busyness would be a step in the right direction, as would determining the role of the AGM, as opposed to the board, in approving directors’ additional appointments. This debate can’t come soon enough.
Konstantinos Stathopoulos is Professor of Accounting and Finance at Alliance Manchester Business School, The University of Manchester
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