It has been argued that serving on multiple Boards afford Directors the benefit of diverse experience that impacts positively on their individual performance and that of the respective Boards on which they serve. The recourse to insight garnered by a Director from dealing with a particular problem on one Board would certainly come handy when a similar problem surfaces on another Board. Companies with “well-connected” Directors inevitably benefit from more networking opportunities as well as access to strategic insights.
However, multiple directorships may become a cause for concern where the Director finds himself in situations bordering on conflict of interest. The Securities and Exchange Commission (SEC) Code of Corporate Governance provides that Directors should not be members of Boards of companies in the same industry to avoid “conflict of interest, breach of confidentiality and misappropriation of corporate opportunity”. Indeed, the NAICOM Code of Corporate Governance for Insurance Companies provides that in selecting a Director, “limited insider relationships and links with competitors” should be considered.
Directors are expected to devote adequate time and resources to their oversight responsibilities. Whilst the SEC Code does not expressly limit the number of concurrent directorships a director may hold, it recognizes that “concurrent service on too many boards may interfere with an individual’s ability to discharge his responsibilities”. The Code enjoins the Board and shareholders to carefully consider other directorships in assessing the suitability or otherwise of nominees for appointment to the Board.
The question then is should numerical limits be set for Directorships?
According to a publication in Business Times, a study of U.S. firms (Too busy to mind the business?) did not find any association between multiple directorships and securities fraud litigation. Yet another study of U.S. initial public offerings (Are busy boards detrimental?) concluded that multiple directorships are not only common among newly-listed companies, but also add value to these companies. There is no limit on multiple directorships in the US.
However, Malaysia’s Main Market restricts a director to no more than five directorships in listed issuers. The Securities Exchange Board of India recently imposed a limit of seven listed directorships. The UK Corporate Governance Code states that a full time executive director should not take on more than one non-executive directorship or chairmanship in a FTSE 100 company. In Zimbabwe, the Corporate Governance Code prohibits directors from serving on more than six boards, while the Singaporean Corporate Governance Code leaves it to the Boards to “determine the maximum number of listed company board representations which any director may hold”.
Interestingly, the Companies and Allied Matters Act Amendment Bill now before the House of Representatives sets a limit of five directorships for Directors on the Boards of Public Companies.
According to a recent research by Inoxico – an online credit bureau that specializes in risk management solutions – each director of the 20 largest companies in South Africa sits on 14 other boards. In response to concerns about directors sitting on too many boards, the Kuala Lumpur Stock Exchange, as part of its listing rules, has limited the number of directorships that any individual can hold to no more than 10 in listed companies and no more than 15 in non-listed companies.
The recently introduced Nigeria Code of Corporate Governance, 2018 provides that concurrent service on too many Boards may interfere with an individual’s ability to discharge his/her responsibilities. To assist the Board in determining the appropriateness of concurrent directorships, it recommends that prospective Directors should disclose memberships on other Boards, and current Directors should notify the Board of prospective appointments on other Boards. The Board should then consider the disclosed directorships, taking into account the number of other directorships and the responsibilities held, and determine whether the individual can discharge his/her responsibilities and contribute effectively to the performance of the Board before recommending such a person for appointment or continued service.
It has been argued that the size and complexity of a company would determine the level of demand on the time and attention of Directors. Accordingly, concurrent service on the Board of several SMEs should not detract from a Director’s ability to perform effectively on the Board of one or two public companies. Some proponents of multiple directorships have also argued that spending more time on Board activities is in itself not a panacea for corporate failure.
However, given the significant responsibilities and time commitment required to function effectively in that office – including reading through and digesting board packs to ensure meaningful participation at Board and Committee meetings, attendance at Board and Committee meetings, participation at Board Strategy sessions and Director Development programmes – the Board should consider setting a numerical limit of concurrent Board memberships for prospective Board nominees.
An effective performance appraisal of the Board and individual Directors is one way of ensuring the right balance. If directors are performing well, the number of boards on which they serve become immaterial.
Bisi Adeyemi is the Managing Director, DCSL Corporate Services Limited. Kindly forward comments and reactions to badeyemi@dcsl.com.ng