U.S. companies that have board directors who hold more than three simultaneous directorships have historically performed more poorly than companies with less "busy" directors, according to a January governance brief from the $195.6 billion Florida State Board of Administration, Tallahassee.
Looking at Institutional Shareholder Services' data through October 2017, SBA staff determined that firms who were "overboarded" had a lower average five-tear total shareholder return of 140 basis points. SBA determined whether a board had too many directorships by dividing the total number held by their directors by the number of board seats.
According to SBA's proxy-voting guidelines on multiple directorships, directors who have significant full-time responsibilities outside their service on board, such as the CEO of a company, should not exceed one external board membership, and "overboarding" is considered to be someone who has some kind of full-time position and serves on more than three boards. SBA during 2017 voted against almost 6% of all directors at U.S. companies, and 35% of those proxy votes were filed due to concerns the director candidates were overburdened by too many directorships.
Mike McCauley, senior officer, investment programs and governance at SBA, said in a telephone interview that as proxy season approaches, he sees how busy the directors on a board are as one of "those fundamental board characteristics we look at."
"We look at it really across every company we own within the equity portfolio," Mr. McCauley said. "We've always had a maybe above-average policy stance."
"The underlying problem or challenge that someone's who's on three, four, five, six or seven boards simultaneously, it's just a capacity issue," Mr. McCauley said. "It's the bandwidth. They have a limited amount of time. They're essentially employees of the company. They're compensated for their service. ... They're there on behalf of the shareholders and their views to provide strategic oversight and governance over management."
SBA said in the brief that shareholder activism regarding the issue of serving on too many boards had helped more companies avoid an overburdened board. As of October 2017, according to the brief, 63 directors within the S&P 500 universe were serving on five or more boards, down from 83 in 2012, and 77% of S&P 500 boards have limits on how many boards on which directors serve, up from 27% in 2005.
However, it is still an issue, as the top 50 firms still had an average directorship of 3.14.
The brief is available on SBA's website.