Perils of multiplicity: probing the risks of overboarding

November 2023  |  FEATURE | BOARDROOM INTELLIGENCE

Financier Worldwide Magazine

November 2023 Issue

Spreading oneself too thin is generally unhelpful in any walk of life. In a corporate context, this is particularly so, and especially at boardroom level where decisions taken by directors can have a material impact on the company concerned.

Such decisions, of course, require focus, concentration and attentiveness; but if these are in short supply, such as when directors attempt to share their knowledge and expertise in the boardrooms of multiple organisations, many find that they struggle to cover all bases.

This practice of directors sitting on too many boards at once is known across the corporate environment as overboarding. And while there is no standard definition of overboarding, an overboarded director is generally considered to be someone who sits on a number of boards which could result in excessive time commitments and an inability to fulfil his or her duties.

“There is no absolute number of how many boards a person should sit on, but typically this is between four and six in developed nations,” states analysis by the Corporate Governance Institute (CGI). “Some investment companies are setting the upper limit at four. Recently, investment firm BlackRock complained about some of its executives sitting on too many boards and stretching themselves too thin.”

The CGI analysis also contends that: (i) the ability of directors to serve effectively may be connected to how many boards they are serving on; (ii) increasingly complex responsibilities require a greater time commitment; (iii) board diversity and refreshment means overboarding will attract more attention in the future; and (iv) the employment status of directors should be considered when assessing how much time directors have available.

Additional issues faced by directors with multiple directorships include increasing regulatory requirements, expectations for shareholder engagement, cyber security threats, disruptive technologies, climate change, human capital management and company culture.

Overboarding in Europe

While a global issue, overboarding is prevalent in particular jurisdictions. According to EY’s latest ‘European Financial Services Boardroom Monitor’ – which charts the profile, experience, training and skillsets of board directors across the MSCI European Financials Index as well that of 300 European financial services (FS) investors – overboarding is a regular occurrence across the European FS sector.

As set out in the Monitor, board directors serving Europe’s largest FS firms currently hold an average of three board seats each, and over a quarter (26 percent) hold four or more. In addition, EY new sentiment polling data reveals that 82 percent of European investors surveyed believe that holding board positions at three or more firms – rising to 85 percent at executive level – could present challenge to board directors’ abilities to fulfil their duty of governing a company.

Drilling down, when asked to identify the primary driver behind directors assuming multiple board positions, just over a quarter of investors cited board members’ desires to gain broader experience and over a fifth cited remuneration. Separately, 19 percent of investors stated their belief that the prevalence of overboarding relates to a shortage of female candidates with sufficient experience (although EY Monitor data does not support this contention).

From a sector perspective, directors holding multiple board positions is most common within

the asset management sector, where 49 percent of board members hold more than two board

positions. The trend is least common in the banking sector, where 39 percent of board members hold more than two board positions.

“Concerns about overboarding and the knock-on effects it could have on governance are increasingly topical,” says Omar Ali, Europe, Middle East and Africa financial services managing partner at EY. “A careful balance must be struck by companies and chairs to build a board with the requisite skills and breadth of experience to face new and increasingly complex risks while ensuring that all members have the capacity to dedicate the time and resources demanded by the board role.”

Boardroom composition

Helping to put the nuances of the overboarding phenomenon into context, EY’s Boardroom Monitor provides a granular analysis of the composition of boardrooms within the European financial services sector, as outlined below.

Technology expertise. Banks are ahead of both insurers and wealth and asset managers in technology expertise among new boardroom appointments: 24 percent of European banks appointed board members with professional experience in technology in the first half of 2023, compared to 19 percent of asset managers and insurers during the same period.

Professional experience. Just under a fifth (19 percent) of Europe’s largest listed banks appointed board members with professional experience in sustainability and environmental, social and governance (ESG) in the first half of 2023, compared with 21 percent of wealth and asset management firms and 9 percent of insurers.

Gender diversity. The gender diversity of banking boardrooms is ahead of wealth and asset management firms but lags insurers. Twenty-eight percent of listed European financial services firms have under 40 percent female representation in their boardroom, the level required by June 2026 to comply with the European Women on Boards Directive.

Female representation. On a sector basis, 24 percent of European banking boardrooms are yet to meet the 40 percent threshold for female representation in the boardroom, compared to almost half (47 percent) of wealth and asset management firms and 17 percent of insurance firms.

“FS boardrooms have changed over the last few years, and chairs and executive teams have actively replaced departures with appointees who bring new and needed expertise – namely in sustainability and technology,” adds Mr Ali. “However, such appointments can only take place if there is a strong talent pool and a growing pipeline offering an ever-wider range of candidates, both of which are crucial to avoid overboarding.”

The perils of multiplicity

The risks facing the FS sector from overboarding are various, but the overriding concern, as the EY Monitor makes clear, is that directors that sit on an excessive number of boards run the risk of not having the time or capacity to contribute effectively to the work of each board.

“Overboarding in the FS sector is a governance risk and firms should be concerned,” suggests David W Duffy, chief executive of the Corporate Governance Institute. “It can undermine effective strategy and cause financial crises, as we have seen in the past. The best boards contain a diverse collection of talents and perspectives. Having the same person appear on several boards can undermine a board’s effectiveness.

“The prestige of having so many well-paid board seats may also influence a director’s willingness to confront the status quo or challenge poor strategy,” he continues. “Some board members may be financially dependent on their seats, which limits their autonomy. Also, serving on a board is demanding, and you need a lot of energy to challenge a poor strategy to be effective. Ideally, a board member should serve as a critical friend to the chief executive and executive management, challenging groupthink and influencing strategy.”

Essentially, the question is whether a multiple board member can be at their best, generally speaking, when their focus is diverted in different directions. “The more boards one serves on the higher the probability that ethical risks can arise,” adds Michael Toebe, founder and specialist at Reputation Quality. “That is strongly worth considering when it comes to adding a new member who could be spread thin by joining another board and whose quality of service may wane when they are serving multiple appointments.”

Compounding the problem is an often blasé attitude toward identifying overbooked board members. “Boards, in their excitement or zeal for gaining access to certain attractive and in-demand board members, are not conducting effective risk management,” opines Mr Toebe. “Thus, little weight is given to reputation safety and board and organisational wellbeing. Potential blowback for performance that fails to live up to expectations would seem, logically speaking, to be higher when a professional is serving on multiple boards,” he adds.

Taking a stand

A high-profile example of a company taking a stand against overboarding recently took place in the US. It involved New York-based firm BlackRock voting against the reappointment of a Salesforce board member – part of Blackrock’s environmental, social and governance (ESG)-oriented policy of trying to improve corporate governance in the businesses it invests in – stating that directors who overboard are a hindrance to ESG efforts.

The blocked reappointment is actually the second time in a matter of months that BlackRock has targeted individuals it believes are stretching themselves across too much corporate responsibility. In the other instance, BlackRock voted to oust the co-chief executive of Silver Lake from the board of Twitter but subsequently agreed to a reinstatement subject to a reduction in commitments to other public boards to a maximum of five by the end of May 2023.

Benefits

Despite the risks associated with serving on multiple boards, on the upside, experienced directors of companies are in high demand in countries around the world, with many holding multiple directorships. Indeed, such directors are able to gain more knowledge, experience and access to social networks and resources, thus adding more value to the company.

“Serving on multiple boards is not always problematic,” contends Mr Toebe. “Board members have significantly deep and wide responsibilities. "What is more important is considering whether a new member who is already serving on multiple boards knows if a prospective board member fully understands the company, board’s business and its objectives, concerns, risks and the board’s inner workings."

Changing dynamics

In business, a company needs to have more or better resources than its competitors – diverse resources such as money, people, time, skill, know-how and influence that need to be brought together, focused and concentrated at the right place and at the right time.

“When we talk about diversity, we do not just mean gender equality; we also mean a variety of backgrounds, experiences and views,” concurs Mr Duffy. “Board members should be representative of society as a whole. A ‘male, pale and stale’ board can be disastrous, as we have seen with numerous giant banks triggering worldwide financial meltdowns. Overboarding attitudes will change as we emphasise how harmful the practice can be.”

Furthermore, as the responsibilities of those with a seat at the top table intensify and directors increasingly require a laser-focus, the likelihood is that disapproval and negative attitudes toward prospective members serving on more than two or three boards will propagate – cementing the understanding that overboarding, more often than not, results in less diversity of analysis and reduced potential for desirable outcomes.

© Financier Worldwide

BY

Fraser Tennant