By Jessica Tasman-Jones
This article is brought to you by Agenda, an FT Specialist publication that focuses on corporate boards
From next year, State Street Global Advisors will break with its peers and scrap numerical overboarding limits for the biggest public companies in the US, according to the investment firm’s president and chief executive Yie-Hsin Hung.
Instead, SSGA will “vote against the chair of the nominating and governance committee at companies in the S&P 500 that do not disclose their internal policy on director time commitments,” Hung wrote in a recent letter to board members.
SSGA will expect companies to determine their own numerical limit for the number of directorships an individual should hold, a spokesperson said. It would also expect each board member’s compliance with the policy and a description of the annual policy review process.
More than 100 (112) boards among the S&P 500 do not report specific limits on serving on other boards, according to 2021 research from executive search firm Spencer Stuart.
But many institutional investors have a numerical threshold at which they consider a non-executive director to be “overboarded” - serving on so many boards that shareholders believe they cannot commit sufficient time to all their roles.
For this proxy season, for example, SSGA might vote against directors who serve as named executive officers and sit on more than two public company boards, non-executive board chairs or lead independent directors who lead more than three public company boards, and other directors who sit on more than four public boards.
Other investment management companies have similar numerical limits. Vanguard, for example, will “generally vote against” a director who holds more than four board roles at public companies, according to its 2023 voting policy. BlackRock’s policy has a number of allowances, including for non-executive directors to sit on four boards in the US.
The change of tack from SSGA comes as overboarding is increasingly scrutinised.
Last year, BlackRock voted against directors in the US technology industry sitting on too many boards, including rejecting the re-election of Egon Durban to Twitter's board due to his seven directorships of public companies. The asset manager’s chief executive Larry Fink wanted to improve the corporate governance of companies in which it invests.
The concerns are partly about increases in directors’ workloads. “Today, directors are busier than ever,” wrote Hung. “... This raises the concern that a substantial increase in directors’ workloads could lead to a degradation of overall board effectiveness over time.”
In 2021, S&P 500 boards held an average of 9.4 formal meetings, up from 7.9 meetings in 2020, according to Spencer Stuart. The workload was higher for the FTSE 150, which met an average of 11.6 times in 2021, up 50 per cent than a year earlier, research by the executive search firmfound.
UK asset manager Redwheel has also stepped up its engagement with board chairs about overboarding. The workload and responsibilities of directors are increasing, particularly in areas such as sustainability, where a lot of individuals will have to learn on the job, says portfolio manager and partner John Teahan. Other crises, such as the pandemic or recession, also test directors, he adds.
With increasing workloads cone questions about board effectiveness. SSGA found that of the governance laggards it had identified in the S&P 500 in 2021, 60 per cent had directors that were overcommitted according to its voting criteria.
Some companies might welcome the move away from the "points-based system", says Kit Bingham head of the UK board practice at executive search firm Heidrick & Struggles. Many directors work little more than a couple of days a week but fear falling foul of shareholders by taking on more board roles, he says.
Private equity board roles often don't count towards shareholders' overboarding calculations, nor do roles on school or charity boards. As a result, candidates who are close to the threshold under the points-based system will turn down opportunities at UK plc and take on these roles instead, says Mark Freebairn, head of the board practice at Odgers Berndtson.
While Freebairn welcomes SSGA's approach, he is cautious about its impact. Nothing will change for directors unless it is adopted by other shareholders. SSGA's guidelines remain unchanged for companies outside of the S&P 500, as well as for Australia, Canada, UK and select European markets.
Already shareholders can withdraw an against vote if a board provides a suitable rationale about why an individual director should continue to serve on the board.
And there are a number of opportunities to deal with underperformance before it comes to a vote. If an individual director isn't giving the time required on a particular board, that can be dealt with via the chair or the evaluation process, Bingham says. "There's plenty of soft influence that gets deployed outside formal votes against."
This article is based on a story written for Agenda by Lindsay Frost.