While the debate over board focus on environmental and social issues has dominated popular attention for the last two years, a similar — though unexpected — controversy may be brewing. It centers on the idea of how many boards is too many for an individual director and whether there should be an exception to tight limits for certain directors.
In the 1980s, multiple board positions became the norm for many directors. And, as corporate boards in that era were viewed as more management advisory bodies than management monitors, this seemed to many to be of limited concern. An individual sitting on more than six boards at a time was not all that rare. This was particularly true of the highly sought-after “celebrity” director.
But by the 1990s, attitudes toward the “serial” director began to change, as investors demanded directors who could effectively engage in better management oversight. The idea became “jack of all trades, master of none.” The more boards one served on, the less attention one could pay to each. The point was simple but compelling.
In 1996, I served on the National Association of Corporate Directors' Blue Ribbon Commission on Director Professionalism. The various governance reforms recommended by that group have since become corporate dogma. Chief among our suggestions was limiting the number of boards that any individual could serve on. We felt that a directorship done appropriately, required a significant amount of time — estimated to be around 190 hours per year. If one was employed full-time, there was no way one could devote the amount of time necessary for effective service on multiple boards. Too many boards meant that organizations were getting short shrift. We suggested that an active CEO should sit on no more than one or two outside boards, three to four for someone otherwise employed, and no more than six for someone fully retired.
At the time, many of the commissioners were concerned that this limit would be hotly opposed by the director community, particularly those who identified themselves as “professional” directors. To our surprise and delight, this recommendation was not at all controversial and since then has been ingrained in the corporate, judicial and investor mindset. The logic of the limit was simply too easy and compelling to dispute. That logic has become even more evident today when, following significant regulatory change, the amount of time required annually to exercise one's duties as a director has increased dramatically. Today, that amount of time is at least 250 hours per year, if not much more, depending on circumstances. So, why would limits on board numbers even be an issue?
The problem has to do with the increased focus on expanding the diversity of the board. A diverse board is critically important to the proper functioning of the company. The greater the diversity of talent and experience, the better the management monitoring. However, there are some who, seeking greater board diversity, have suggested that a relaxation of the limits on board numbers is in order. They argue that, as there is a limited pool of diverse directors, those directors should not be subject to the same limits as others. This is a dangerous approach based on several false premises.
First, the pool of competent and excellent diverse director candidates is wide and deep. To suggest that only a handful of “diverse” individuals are qualified for board service is wholly incorrect.
Second, effective board service, while rewarding, is highly time-consuming. That is why limits on service were created to begin with. Serving on too many boards means that someone, or everyone, gets shorted. This is bad for the company and the directors themselves. The argument that one cannot be expected to focus on individual companies because their talents are broadly requested does not fly. One is expected to expend their fullest efforts on any board on which they serve. Any time constraints imposed on a director based on a multiplicity of boards are unlikely to find either judicial or shareholder sympathy. If you don't have the time to serve, don't. It is unfair to your shareholder employers and to you individually.
Third, to suggest that one's primary value to an organization is their personal diversity based on some immutable characteristic is highly insulting to that individual and just plain wrong. One's value to a board or to any other organization has to do with their individual spark or genius, not how they fit into some genetic paradigm.
A person serves as a director based solely on their individual talents and skills. To give one a pass on the sensible and prudent board limitation standard does neither the board member nor the shareholders any good. Let's hope that, like many bad ideas, this approach finds few friends.
Charles Elson is executive editor-at-large of Directors & Boards.