NEWSLETTER // March 2015

Multiple Directorships: To Be or Not To Be?

Multiple directorships are a fact of commercial life. But the concept has its proponents and detractors who largely see it as affecting the bottom line of the companies that an individual directs. Just what are the pros and cons of holding multiple directorships in South Africa? 

 

According to a recent research by Inoxico, an online credit bureau that specialises in risk management solutions, each director of the 20 largest companies in South Africa sits on 14 other boards. This increases the risk for fraud and non-compliance with governance requirements in the Companies Act. It also raises also raises the quality and independence of board decisions.

 

In response to concerns about directors sitting on too many boards, the Kuala Lumpur Stock Exchange, as part of its listing rules, 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. 

 

While studies have shown that there is no empirical evidence that companies with directors holding multiple directorships have poorer governance or performance issues, it is argued that those sitting on the boards of well- performing companies earn reputations and hence attract appointments for additional directorships in other companies. 

 

The Highs

Multiple directorships, obviously, can have economic benefits. It can be a powerful tool for unlocking doors for a company and moving its strategy forward. An emerging view is that board-directing is as much a task of governance and compliance as it is of strategy-support.

 

Patricia Lenkov, Executive Recruiter specialising in senior level executive search and board of directors recruiting at Agility Executive Search, says an executive can see a variety of companies in various industries with each [company] going through unique challenges. “This is intellectually challenging but hopefully interesting and satisfying as well.”

 

Companies with well-connected boards have greater future operating performance and higher future returns than companies whose boards are less connected. The positive impact of well-connected boards is accentuated among firms that are either emerging or recovering and in need of transformation.  For example the apparent success of start-ups such as Facebook is largely due to the presence of very influential and well-connected directors.

 

Multiple directorates can be a rich source of privileged information. Those who access useful information first are placed at a strategic advantage. For instance, a multiple director can alert a company concerning out-of-industry players who can threaten a firm’s current business model. Thus, they can play a critical business intelligence-gathering role and by so doing hybridise divergent ideas into innovations.

 

Add to this the numerous and beneficial networking opportunities that arise from multiple directorships, says Lenkov. She explains that boards are made up of senior level individuals and explaining one’s network among this group can be positive as well.  

 

The Lows

Several institutions including the Stanford Graduate Business School, US, have identified a number of handicaps dragged into the economic system through multiple-board directorships. These are reduction of director effort, collusion, spread of bad practices and bad information.

 

First, reduction of director effort which leads to worst oversight is one of the setbacks of multiple directorships. Each directorship will require attending the actual board meetings which tend to take place anywhere from on a quarterly basis or even monthly. The in-person committee meetings which usually happen just before the board meeting as well as travel time to and from the meeting location and telephone calls in-between meetings make for a busy schedule. If a company is experiencing any kind of crisis or even just difficulties of some sort then the time commitment increases significantly.

 

There Is Never Enough Time!

McKinsey, the world’s largest management consultancy group, has tried to quantify the effort a director should invest in board work. Between April 4 and April 15 2011, McKinsey surveyed 1 597 corporate directors from all the major geo-economic zones -31% of whom were chairpersons- on wide-ranging issues relating to the state of corporate governance in the aftermath of the economic and financial crises of 2008.

 

Of the 625 directors interviewed, board chairpersons revealed that they were at that time devoting, on average, 36 days a year to the board. Non-chairs indicated that they were allocating, on average, 25 days in a year. On what they envisaged as being sufficient time to devote to board work in view of the need for directors to devote more time to strategy, board chairpersons indicated that increasing their time allocation to 48 days in a single year would be ideal. Non-chairs suggested increasing days spent on board work to 35 days in a single year.

 

Secondly, multiple directorships can act as sources and channels of harmful information, assisting the establishment of bad business practices. It can lead directors to join the bandwagon of cronyism where directors believe that, “since almost everybody is doing it; why should I be left out?’’. 

 

The issue of remuneration of senior executives also arises as a result of multiple directorships. Lacking a clear remuneration strategy, directors sitting on multiple boards can influence their boards to approve remuneration packages of senior executives that reflect those of the senior executives of the other firms on whose boards they serve.

 

Thirdly, collusion among firms that have interlocking directorates is an omnipresent prospect. Multiple directorates can result in a powerful circle of corporate elites who dominate and influence business direction in an industry. When directors of firms sit on the boards of each other’s firms, it creates a direct interlock. 

 

Being a director is no child’s play, elaborates Lenkov. Rather, it is a major responsibility that has increased significantly over the past 10 years or so. “Holding multiple such responsibilities can be unwieldy and take up enormous amounts of time. This is particularly disadvantageous when the director holds a full time executive position as well,” laments Lenkov.

 

The Way Forward

Well, it may not make business sense to suggest that one should turn down an opportunity to become a director in several companies. But Lenkov suggests that should the opportunity arise, then maybe you should consider quitting your ‘day job’ because the commitment and responsibility is simply too great!

 

“Executive directors are not part-time team members and the responsibility of their board work is very different. They ‘live with’ the company. They swerve day in day out, tackling different challenges,” she says. 

 

Of course, the more directorships one holds the greater the risk of some kind of conflict. However, notes Lenkov, this does not have to be the case if directorships are selected carefully and sequentially: which should be the case no matter what.

 

The phenomenon of assuming multiple directorships has increased in popularity worldwide recently. “It is now common place for executives in the latter stages of their career to step down from their regular job in order to become more of a professional director. There are many such individuals who take up to four board seats as a full-time career choice after they have finished the traditional career path,” concludes Lenkov. 

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