Although one might reasonably question whether there can ever be a sufficiently objective measure of director “busyness,” a consensus actually has emerged that a director is considered “busy” if he or she sits on three or more boards, according to “Going overboard? On busy directors and firm value” by George D. Cashman, Stuart L. Gillan and Chulhee Jun in the June 2012 Journal of Banking & Finance. And while there have been different views expressed over the years concerning whether holding multiple outside directorships is good or bad, with some scholars arguing a “busy” director is positive evidence of that director's abilities and effectiveness, and others arguing that a “busy” director is overcommitted and thus less effective as an adviser and monitor, the authors in their article found “a consistent negative relation between busy directors and firm performance.”
Certainly, it would seem to be a matter of common sense that, at some point, a director can take on too many outside commitments to be effective in monitoring and advising senior management, which can, in turn, lead to diminished firm performance. Whether that numerical trigger is three outside directorships, it remains the case that, from a due diligence standpoint, it is important to pay heed to this issue when contemplating a sizable investment in a company. Does the board of that company have directors with an excessive number of outside commitments? Even if one is loath to automatically draw an adverse inference from the fact that some directors have two or three outside directorships, what happens if a director has twice that many? The comfort level of each institutional investor may vary, but at some point a director's overcommitment to outside interests will call into question his or her ability to effectively monitor firm performance.
A Feb. 29, 2012, Wall Street Journal article reported that in 2011 there were 118 top officers at Fortune 1,000 companies with at least three directorships and that some major institutional investors were beginning to express their displeasure by opposing board re-elections of executives with more than one outside board seat. The time commitment required to sit on a board rose to about 228 hours annually in 2011 from about 210 hours annually in 2006. Average director compensation rose to $232,000 in 2010 from about $215,000 in 2009. One of the CEOs referenced in the article served on the boards of five different companies in addition to his own, earning director compensation totaling $373,874 annually.
Related to the issue of whether a board member, either an inside or outside director, is too weighed down with directorships to be an effective monitor is the question of what those other directorships might say about that director's relative value, or even his or her professional competence. A May 26, 2012, New York Times article reported one of Facebook Inc.'s directors, James W. Breyer, who is a partner at a venture capital firm, also served on the boards of five public companies, four of which were “experiencing high-profile problems.”
Any due diligence inquiry thus should address not only the number of outside directorships, but also the performance history of the companies attached to those directorships in order to help evaluate whether the director in question has demonstrated sufficient competence in that position.