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Are directors going overboard?

26 June 2018 by Lorraine Young

Are directors going overboard?

Rigid voting recommendations on directors’ commitments risk boards losing out on talent

The UK Corporate Governance Code notes the importance of directors – particularly non-executive directors (NEDs) – being able to dedicate enough time to the companies on whose boards they serve. One of the main principles in Section B of the code, ‘Effectiveness’, states: ‘All directors should be able to allocate sufficient time to the company to discharge their responsibilities effectively.’

The related provisions describe how the chair and other NEDs should disclose their other ‘significant commitments’ at the time of their appointment and update the board with any changes.

For the company secretary who struggles to arrange board meetings that everyone can attend, whether a year in advance or for some urgent matter outside of the usual timetable, the diary juggling can be a real headache.

Making judgements

As we explored earlier in the year, some of the investor voting guidelines now seekto tackle this issue and have introduced ways to calculate whether a director is over-committed. However, this can result in a ‘tick box’ interpretation of the code, with no human discretion or judgement applied. In the ‘Comply or Explain’ section at the start of the code, it states: ‘The code is not a rigid set of rules.’

However, some participants in the voting chain turn it into just that. For the busy fund management houses, who rely on the voting guidelines to make their decisions for them, there could be unintended consequences. 

“Directorships in different companies require different amounts of time”

The best approach is clearly for the chair (and the rest of the board) to consider time commitment as part of the annual review of each director’s performance and the decision about whether or not to support their re-election at the AGM. This should also apply to the chair themselves when the senior independent director leads the review of their performance.

Directorships in different companies demand different amounts of time. Smaller companies and simpler businesses will normally require less time commitment than larger, more complex organisations. The code states that: ‘Shareholders should pay due regard to companies’ individual circumstances and bear in mind, in particular, the size and complexity of the company and the nature of the risks and challenges it faces.’ However, any company may run into a ‘crisis’ situation, and when this happens, it is all hands on deck and the time needed can be a great deal more.

For those with a portfolio of appointments, this can present a challenge. The other boards on which they serve have a choice – to manage as well as they can while the crisis at the other place goes on, or ask the director to step down. However, most organisations recognise that the next crisis might hit them and then they will be requesting the extra time from their own board, so a little tolerance can go a long way.

The investor guidelines which present a formula based on the number of directorships of listed plcs to work out if someone has enough time to devote to a role ignore roles in other organisations, such as charities, those in the education sector or large private limited companies. These can be just as time consuming as plc roles and as prone to the occasional crisis.

Many individuals who hold several NED positions have had busy and demanding executive careers and are used to working long hours, being available on their holidays and so on – and balancing the different roles is possible. Many company secretaries will be able to identify with this kind of schedule, too, as supporting the board is not a nine-to-five, five-day-a-week job.

“The voting process still needs the human touch”

Attendance at board and committee meetings can be a useful indicator of time commitment but it needs to be taken in context. There can be perfectly acceptable reasons for a director to miss
the occasional meeting.

There are also other events directors might attend but which are not reported in the attendance table – site visits, strategy dinners, meetings with the executive team to provide support or to learn more about the business and meetings with other stakeholders. The board will have the full picture of someone’s time commitment, which investors will not be able to appreciate by adding up the number of appointments and meetings attended.

Companies do need to bite the bullet and deal with performance review for the board. This can be tricky, but is not a reason to sweep it under the carpet, and if a director is persistently unable to attend meetings, a difficult conversation may need to be had about whether they can really make the time commitment needed to do the job properly.

There needs to be some disclosure on this so investors can understand a process has taken place and the board as a whole is satisfied each director is pulling their weight. Then the number of other roles a director holds (barring extreme cases) should not be an issue in deciding whether or not to support their re-election.

Unintended consequences

The voting process for company meetings, particularly the AGM, has always been
hard to manage and it is clearly not getting any easier. Investors are coming under more pressure to vote and give reasons for how they have voted.

The largest may have well-resourced governance teams, but many are not able to read the annual report of every company in which they invest in great detail and come to a reasoned view on the voting issues. So the use of voting recommendations is understandable, if sometimes unfortunate.

Where the matters are straightforward and votes in favour are recommended, the system probably works well enough, but if votes against or abstentions are suggested and the investors follow these blindly, they could be playing a dangerous game.

Some NEDs are now experiencing much higher votes against their reappointment than before because of the overboarding issue. This can put them off standing for re-election – no one wants the embarrassment of being voted off a board. And with the new ‘name and shame’ dissent register on the Investment Association website, the ‘shame’ can be prolonged. So the beleaguered NED may decide to stand down. Those in the voting agencies may then say they have achieved what they set out to do – directors with too many appointments now have fewer.But this is far too simplistic. There is a real risk boards could lose talented directors for no good reason.

The voting process still needs the human touch. This is just one area where ticking boxes can have a seriously detrimental effect on the way a company is run.

Lorraine Young FCIS is a partner at Shakespeare Martineau

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