Time Is Money: The Link Between Over-Boarded Directors and Portfolio Value

Michael McCauley is Senior Officer, Investment Programs & Governance, of the Florida State Board of Administration (SBA). This post is based on a publication from the Florida SBA by Mr. McCauley; Jacob Williams, Corporate Governance Manager; and Tracy Stewart, Senior Corporate Governance Analyst.

The latest publication on corporate governance from the SBA analyzes the number of directorships at U.S. companies and its correlation with company stock performance. The investment study reviews “over-boarded” directors at U.S. companies within the Russell 3000 stock index and finds a strong inverse relationship between the level of directorships and total shareholder return (TSR) across the 1, 3, and 5 year time periods ending October 2017.

The SBA acts as a strong advocate and fiduciary for Florida Retirement System (FRS) members and beneficiaries, retirees, and other non-pension clients to strengthen shareowner rights and promote leading corporate governance practices at U.S. and international companies in which the SBA invests. The SBA’s corporate governance activities are focused on enhancing share value and ensuring that public companies are accountable to their shareowners with independent boards of directors, transparent disclosures, accurate financial reporting, and ethical business practices designed to protect the SBA’s investments.

Key insights of the Time is Money brief study: 1) Corporate boards with above average levels of directorships exhibited lower average 5-year stock performance of approximately 140 basis points (1.4%); 2) At those companies with the highest sum of directorships among all board members, the level of full board directorships was 76% higher than the average firm, and their 1, 3, and 5-year stock performance was lower than other companies with lower average board directorships; and 3) Applying SBA proxy voting guidelines to U.S. firms results in voting against 5.6% of all directors at American companies due to the risks presented by over-boarded directors.

For the last two decades, the SBA has advocated limiting the number of simultaneous directorships held by U.S. board members. The SBA’s governance principles espouse non-CEO directors who are also employed full time to hold fewer than four simultaneous directorships. In line with this policy, SBA staff have routinely cast commensurate proxy votes based on this numerical threshold and applied the policy on a global basis, regardless of any home country bias or local market norms. During calendar year 2017, the SBA cast votes against directors in foreign equity markets at rates of 14.5%, 10.9%, and 5.6% for India, China (including Taiwan & Hong Kong), and the United Kingdom. The U.S. is the single largest market for SBA director voting, comprising approximately 42% of annual director voting.

As well, numerous academic and industry studies point to the likelihood of both higher costs and lower performance when directors are “over-boarded.” As part of the review of individual director service, SBA staff often qualitatively examine other types of board membership including nonpublic entities (e.g., private companies), boards of trustees (e.g. for mutual funds), philanthropies, and foundations. So the analysis extends well beyond merely counting the number of public board seats an individual director maintains. As of October 2017, the average sum of all directorships held by all board members at constituent companies in the Russell 3000 stock index equaled 14.9, with the average individual director serving on 1.65 boards.

Many critics of busy directors allege that such individuals don’t have the time and resources to adequately monitor all the firms for which they serve. And as a result, they achieve poor levels of strategic management and oversight—that is, the effectiveness of corporate governance at those firms is less than what it would be if they were not over-boarded. Because of this alleged deficiency, many investors oppose busy directors, either through direct engagement with the company or through proxy votes cast at owned companies. For the SBA, directorships are an important driver of global proxy voting decisions.

Using data from Institutional Shareholder Services’ (ISS) DataDesk database, SBA staff analyzed both the level of multiple directorships exhibited by the full board of directors and the sum of individual directors’ multiple directorships. Examining data through October 2017, staff found that corporate boards with above average levels of directorship exhibited lower average 5-year TSR performance of approximately 140 basis points (1.4%). For those companies where the deviation was the most extreme—the top 50 companies by level of multiple directorship—firms underperformed by 102 basis points (1.02%) when compared to the full stock universe. A strong inverse relationship between the level of directorships and TSR was found in the data across the 1, 3, and 5-year time periods.

The complete publication is available here.

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