Should an investor be impressed or concerned where a Director serves on multiple boards?

Should an experienced executive accept an external board position?

On how many boards is an experienced director able to competently serve?

These questions all ask: does it matter how “busy” a director is?  Although most governance guidance and corporate reports do not indicate how much time a director is expected to commit to their directorship role, it is estimated that it will be 15 to 25 days per year, with the role of Chair requiring a commitment of up to three days per week (Cook, 2018; Treadwell, 2006).  This does not take into account the additional commitment of committee memberships or an allowance for additional time during a period of change or crisis.  Thus these figures are probably best viewed as a minimum expectation.    A “busy” director is then viewed as one with three or more directorships and factoring in the upper limit of the time commitment, that still means only six days per month. Thus does it really matter that a director is “busy”?

There are two views on this: the “Experience Hypothesis” and the “Busyness Hypothesis” (Clements, Neill, & Wertheim, 2015).  The “Busyness Hypothesis” states that serving on multiple boards leads to distracted and/or overcommitted directors, leading to a decrease in corporate governance effectiveness. However, the “Experience Hypothesis” posits that serving on multiple boards provides a director with a wide range of valuable experiences, which in turn leads to increased governance effectiveness.  So which is true?

Numerous studies in different jurisdictions have found evidence of negative associations with busy directors, supporting the “Busyness Hypothesis”  (Adams & Ferreira, 2008; Chiranga, Chiwira, Sarker, & Sarker, 2014; Falato, Kadyrzhanova, & Lel, 2014; Faleye, Hoitash, & Hoitash, 2011; Fich & Shivdasan, 2006; Jiraporn, Singh, & Lee, 2009; López Iturriaga & Morrós Rodríguez, 2014; Tarkovska, 2017).  However, “busyness” could simply be a proxy for some underlying governance issue, for example, a powerful CEO who can influence the director nomination process  (Adams, Hermalin, & Weisbach, 2010).

There is some evidence that the benefits and costs of multiple directorships may depend on the firm characteristics (Lee & Lee, 2014).  For example, smaller firms may benefit from the “Experience” effect where directors serve on boards in a similar industry but the “Busyness”  effect dominates where the other boards are in unrelated industries (Clements et al., 2015). This result does not translate to larger companies possibly as the directors of small companies will not typically be appointed to the boards of larger, more complex organizations where significant beneficial experience effects would likely occur.

However, concerns continue to be expressed about the amount of time required to be effective and that many Directors do not give, or may be unable to give,  the  necessary time (Pozen, 2010).  Some governance guidance recommends limiting the number of directorships (Aflac Incorporated, 2018) with another explicitly recommending a maximum of five directorships (Council of Institutional Investors, 2018).  There are also increasing expectations of directors with a higher focus on governance and the risk management role of the board following corporate scandals of the 1990s and 2000s, and the failures and bailouts of financial institutions in 2008-9 that has changed the role irreversibly. In Ireland busy directors were a feature of Irish companies just before the banking collapse, before easing off between 2010 and 2013 as the focus intensified on corporate governance (Paul, 2017). Shareholders and regulators are more active, with non-executive directors a target for questioning and a conduit for information, responsibility and accountability.  Thus the modern non-executexecutive director must be professional, and be prepared to commit a significant amount of time to the role, impacting the number of directorships they can reasonably accept and ensure they are fulfilling their director’s duties and protecting their own reputation.

Adams, R. B., & Ferreira, D. (2008). Do directors perform for pay? Journal of Accounting and Economics, 46(1), 154–171.

Adams, R., Hermalin, B. E., & Weisbach, M. S. (2010). The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey. Journal of Economic Literature, 48, 58–107.

Aflac Incorporated. (2018). Guidelines on significant corporate governance issues.

Chiranga, N., Chiwira, O., Sarker, J., & Sarker, S. (2014). Impact of Multiple Directorships on Performance for Companies Listed on the Johannesburg Stock Exchange (JSE). Economics, 2(6), 378–387.

Clements, C., Neill, J. D., & Wertheim, P. (2015). Multiple directorships, industry relatedness, and corporate governance effectiveness. Corporate Governance: The International Journal of Business in Society, 15(5), 590–606.

Cook, L. (2018, March 1). Have you got what it takes to be a non-executive director? Financial Times. London.

Council of Institutional Investors. (2018). Corporate governance policies.

Falato, A., Kadyrzhanova, D., & Lel, U. (2014). Distracted directors: Does board busyness hurt shareholder value? Journal of Financial Economics, 113(3), 404–426.

Faleye, O., Hoitash, R., & Hoitash, U. (2011). The costs of intense board monitoring. Journal of Financial Economics, 101(1), 160–181.

Fich, E. M., & Shivdasan, A. (2006). Are Busy Boards Effective Monitors? The Journal of Finance, 61(2), 689–724.

Jiraporn, P., Singh, M., & Lee, C. I. (2009). Ineffective corporate governance: Director busyness and board committee memberships. Journal of Banking and Finance, 33(5), 819–828.

Kinsbergen, S., Tolsma, J., & Ruiter, S. (2011). Bringing the Beneficiary Closer: Explanations for Volunteering Time in Dutch Private Development Initiatives. Nonprofit and Voluntary Sector Quarterly, 42(1), 59–83.

Lee, K.-W., & Lee, C.-F. (2014). Are Multiple Directorships Beneficial in East Asia? Accounting & Finance, 54(3), 999–1032.

López Iturriaga, F. J., & Morrós Rodríguez, I. (2014). Boards of directors and firm performance: the effect of multiple directorships. Spanish Journal of Finance and Accounting / Revista Española de Financiación y Contabilidad, 43(2), 177–192.

Paul, M. (2017, November 3). Fishing from a small gene pool: Irish boards and interlocking directorships. The Irish Times. Retrieved November 26 2018 from http//irishtimes.com

Pozen, R. C. (2010). The Big Idea The Case for Professional Boards. Harvard Business Review, 88(12), 50–59.

Ramsay, A., Fulop, N., Fresko, A., & Rubenstein, S. (2010). The Healthy NHS Board: a review of guidance and research evidence. NHS National Leadership Council, (January), 1–58.

Shivdasani, A., & Yermack, D. (1999). CEO Involvement in the Selection of New Board Members: An Empirical Analysis. The Journal of Finance, 54(5), 1829–1853.

Tarkovska, V. (2017). CEO Pay Slice and Firm Value : Evidence from UK Panel Data. Review of Behavioral Finance, 9(1), 43–62.

Treadwell, D. (2006). The role of the non-executive director: a personal view. Corporate Governance, 6(1), 64–68.