Institutional investors have flagged the issue of board directors’ capacity as a key governance issue. While neither investors, advisory groups, nor the directors believe there should be a hard and fast rule for the number of directorships that can be held simultaneously, the concern over the potential governance risk of having over committed directors has led institutional investors to flag it as an issue when engaging with board chairs.
The issue of directors’ capacity and commitments is often first raised with the chair.
“The port of call for us is to have some confidence that the chair has a clear view of the expectations on the board,” said Phillip Spathis, Manager – Strategy and Engagement at the Australian Council of Superannuation Investors (ACSI), a body representing 41 ‘profit-for-member’ superannuation funds with more than AU$300bn in assets under management. “We have been impressed with many [directors], but there are also examples where you can’t but help think that some directors are overstretched or overcommitted, and that in itself can cause some form of risk, and could impact on the capacity of a director to have a clear line of sight because of other commitments. This only becomes more exacerbated when there’s a crisis or an issue arising of a more acute nature at some time. That can happen and does happen.”
In their guidelines for superannuation trustees who monitor Australian listed companies, ACSI states that prospective or current directors should inform the board of their external commitments that might impact their ability to fulfil their responsibilities– employment as well as directorships of other profit and not-for-profit organisations. ACSI says in the guidelines that “In general terms, it would be prudent if a director did not hold more than four directorships in ASX-listed companies. However, it is recognised that a director’s capacity to properly discharge their responsibilities will be assessed by investors on a ‘case by case’ basis.”
Spathis said that ACSI doesn’t hew to the formula when talking with board chairs about the commitments of board members or nominated board members.
“It’s not a strict formulaic approach,” Spathis said. “In the guidelines we talk about the overall view and what the maximum number of directorships should be, but with engagement, with discussion we find a point of confidence. If the reasons from the chairperson aren’t all that clear, we do try and reach out and talk to the individual director concerned. That becomes a process on their part of trying to defend the portfolio. In the end, if we’re not confident, we recommend against the election or re-election of a board member.”
This approach of case-by-case engagement is taken by other institutional investors as well.
McKay Ros McKay, governance manager at the AU$36.1bn Victorian Victorian Funds Management Corporation (VFMC), a public authority that provides investment and funds management services to Victorian public bodies, told The Sustainability Report in July that board concentration is a serious concern for the VMFC.
“Often we have discussions with companies about capacity of directors, which is something that we take into account quite seriously,” she said. “We place a lot of emphasis on directors and the role they play in terms of overseeing executives and removing the agency problem that exists. We engage quite regularly on the issue of capacity and the ability of directors to take on the role in light of other positions that they hold on other boards, listed and unlisted, and other executive positions.
“Often that discussion ends up with us requesting additional or improved information about nomination processes, monitoring the company has in place and annual review processes for directors, to give us comfort about the rigor of these processes. Once you have this discussion, you can urge them to have more disclosure around the issues and the contingency issues in place.”
“A director should be able to serve on any number of boards, as long as they are able to fulfil their duties to all of their organisations,” the institute said in a statement to The Sustainability Report. “Creating a ‘one-size-fits-all’ mandatory limit on the number of directorships held by a single person would have negative impact across all Australian boards, including the not-for-profit (NFP) sector. A number of directors serve on commercial and NFP boards, and limiting the number of directorships that can be held by an individual would potentially result in a loss of invaluable knowledge and experience from NFP and other boards.”
The issue of directorship capacity is intrinsically tied to the fact that boards are often trawling in fairly limited pools of potential directors.
“There’s been a slow widening of the available pool of directors,” said Spathis of ACSI. “You still have a situation where 70% of new appointees come from the ASX100. If there is a widening, there’s a very slow evolution to that. That, also, is best manifested in the continued small proportion of women on boards. I think we have to be mindful of that, and encouraging companies to go beyond the pool to the wider pool of available people in corporate Australia, public service Australia, and non-profit Australia. I think there is a risk that basically, you’ll be churning the same people. There is a place for experience, but experience can manifest themselves from a range of places.”
These capacity constraints will only become more intense with comply-or-explain pushes to increase the number of women directors. More than half – 55.3 percent – of ASX200 companies reported at least one woman director, up from 43.5 percent in 2010, according to a report released earlier this year by Governance Metrics International. However, only 2 percent of ASX200 companies had at least three women directors on their board, no change from 2010. The issue is an area that VMFC for one is keen to stay on top of.
“In the last month or two, we wrote to the ASX200, just letting them know that we support the ASX corporate governance principles and we will be taking disclosure against these principles into account when considering the appointment or re-election of new directors,” said McKay. “We also directed them to VFMC’s policy to see what our views are on capacity. Those responses have started coming back in. It’s another issue that’s going to play out over time.”