Overboarding may become a significant issue for Canadian directors
In the last few years, a great deal of emphasis has been placed on ensuring boards have the appropriate breadth of knowledge to cover both their rising risk oversight responsibilities and their fiscal oversight mandate. In response, many have taken steps to diversify their makeup and bring in top people in the areas most relevant to their business and industry—with the most coveted candidates exhibiting lengthy and varied director experience.
This necessary evolutionary step has given way to a new trend—something many commentators refer to as “overboarding”. In essence, overboarding is a paradoxical situation where individuals are viewed as serving on too many boards—and thus taking on too much responsibility—to effectively discharge their duties to each.
Both major global proxy advisory services—Institutional Shareholder Services (ISS) and Glass Lewis—have expressed concern about directors sitting on too many boards, as they believe this impacts a director’s ability to effectively represent the interests of shareholders. The fact is, the time commitment for U.S. company directors over the past 10 years has increased by an average of 46%, while in Canada board members spend more than 300 hours per year, per board—and these numbers are often even higher for larger-cap companies.
As a result, ISS has issued new policy relevant to public companies in both the U.S. and Canada (with some differences). Canadian public companies and their boards should be aware of this policy shift and how it may affect board makeup and director behaviour.
How are the standards changing?
Both ISS and Glass Lewis are tightening their expectations around what constitutes overboarding, and issuing separate standards for both the U.S. and Canada. ISS will consider non-CEO members of Canadian company boards to be overboarded if they sit on more than four boards (the U.S. has a higher threshold, at more than five), while for CEO members, the maximum is two.
However, a second test will also be applied to Canadian companies—one that will look at attendance in addition to board membership. If a board member who serves on more boards than the relevant threshold has attended less than 75% of their cumulative board meetings over the past 12 months without valid reasons, they will be considered to be overboarded.
As an added deterrent, there is punitive potential for those found to be offside. While ISS has not made a negative recommendation in 2016, they are expected to do so in 2017 for directors exceeding these thresholds.
Understanding the board’s role
Audit committees require deeply-specialized knowledge and may well have members who, because of their skill sets, have been sought out to serve on multiple boards. However, given the ISS plan to issue negative recommendations against overboarded directors in the future, this could become a serious reputational issue. Now is the time to ensure that your company isn’t affected and also to apply the relevant standards when bringing new members to the board and audit committee.
This is the first part of a three part series.
John A. Gordon, Canadian Managing Partner, Quality and Risk Management
Christopher J. Cummings, Partner, Paul, Weiss, Rifkind, Wharton & Garrison LLP
Shea T. Small, International and Business Strategy Leader, Partner, McCarthy Tétrault LLP
Read Part 2: Raising the bar on responsibility
Read Part 3: Executive compensation clawback rules in Canada