Have you had occasion to witness the benefits associated with one or more of your board’s directors also serving on other boards? If you’re like many corporate secretaries or other governance professionals, the answer is a solid yes. Whether such advantages reflect “been-there-encountered-that” experience, a nuanced understanding of governance and the challenges and opportunities your board and organization face, or the extent of a given director’s networks, the benefits can be significant. The presence of in-demand, well-informed and well-connected directors can add significant value to your organization.
As with ice cream or certain refreshing liquids on a hot summer day, though, there can be too much of what seems like a good thing. In the case of directors serving on too many boards at the same time, global law firm Norton Rose Fulbright has published 2019 proxy season updates on recommendations and guidelines established by Institutional Shareholder Services Inc. (ISS) and global governance service provider Glass Lewis on what’s known as director overboarding. This term refers to a director’s capacity to effectively fulfill commitments and discharge duties while serving on a number of boards.
The Ins & Outs of Interlocking Directorates
If an executive officer serves on more than two outside company boards, Glass Lewis would consider this person an overboarded director. The same would be true of a non-executive board member serving on more than five public company boards, except in the case of TSX-V (TSX Venture Exchange) directors, who may serve on up to nine boards without attaining the “overboarded” label. ISS defines a CEO director who serves on more than two outside public company boards as overboarded; it views non-CEO directors serving on more than five public company boards in the same manner.
Director overboarding is just one issue you and your board need to consider when it comes to director recruitment. In addition to specific skills and experience, your board requires diversity and independence of its prospective nominees.
When you consider director independence, what comes to mind? Three core principles apply. First, the board will want to ensure that a nominee has no material relationship with the organization. Second, the individual must be independent of management. Finally, a director must derive no financial benefits from a company other than directors’ fees and any shareholdings.
There’s more, though, to independence. The Canadian Coalition for Good Governance (CCGG) has established guidelines to support the independence and accountability required of an effective board. In Building High Performance Boards, the CCGG recommended that at least two-thirds of all directors be independent. This publication spoke to interlocking relationships, which can occur when two or more directors of a given organization also serve alongside one another on another organization’s board. In addition, the CCGG addressed committee interlocks; that’s what you’ll have if those two directors who serve on two common boards are also members of the same board committee. The CCGG recommended the establishment of a publicly disclosed board policy limiting the number of board and committee director interlocks.
Best Practices for Approaching An Interlock
As another best practice, the CCGG recommends clear reporting to shareholders of all board and committee interlocks. Illustrations of such practices may be found in CCGG’s 2018 Best Practices for Proxy Circular Disclosure and in the Bank of Montreal’s (BMO’s) 2019 Annual Meeting proxy circular. The latter reported that the BMO board monitors those outside boards on which its directors also serve, in order to assess whether there are “circumstances that would impact a director’s ability to exercise independent judgment and to confirm each director has enough time to fulfill his or her commitments to us.” An interlock definition and a table reporting a single interlock follow, along with disclosure of related board policy.
Your board and its potential nominees will also want to consider independence and accountability in the context of regulations and legislation. A director has a fiduciary responsibility to oversee the business and affairs of a company. With responsibility for organizational oversight, directors must acquit themselves in a manner that meets expectations associated with duties of loyalty, care and obedience. Further, directors must act in good faith and in the best interests of their corporations. Duty of loyalty requires that a director prioritize the interests of the corporation and not only its shareholders, but also its stakeholders, over personal interests. Imagine the responsibility associated with meeting all of these obligations for not one or two, but five, boards.
Board Recruitment & Interlocking Directorates
Your board will want to consider interlocking directorates when it comes to board recruitment. When identifying prospective nominees, you’ll want to know about an individual’s governance experience and current directorships. That’s relevant from the perspective of board and director performance and, in the U.S., you’ll also want to ensure that your board doesn’t violate anti-trust legislation.
In the U.S., if your board were to recruit a director who simultaneously served as a director or officer of a competing corporation, your corporation could potentially be in violation of the Clayton Antitrust Act (the Clayton Act) of 1914. There are certain exemptions, but if both corporations are engaged in commerce with surpluses, capital and profits exceeding thresholds that are reviewed annually by the Federal Trade Commission (FTC), that could represent a prohibited interlocking directorate.
It’s been more than a century since U.S. legislators identified issues with interlocking directorates. The current Assistant Attorney General, Makan Delrahim, has reflected that the prohibition addresses the concern that a board member or officer “could exchange competitively sensitive information and coordinate business decisions between competitors.” GMI Ratings (subsequently acquired by MSCI) has also identified issues associated with interlocking directorates. These include option back-dating, excessive compensation in cases of performance failure, and perk-laden consultancy or retirement CEO packages that some may also characterize as excessive.
Section 8 of the Clayton Act precludes an individual from serving as a board member of competing corporations. The same would be true if your board were to recruit as a director the officer of a competing corporation. Under Section 8 of the Clayton Act, the FTC is charged with preventing and eliminating interlocking directorates.
In May 2019, AAG Makan Delrahim noted that the Antitrust Division was “looking into the law governing interlocking directorates and bringing it forward to account for modern corporate structures.” Limited liability companies (LLCs), for example, were not envisioned in the language of the Clayton Act.
Where does all this leave you as a governance professional supporting your board’s drive for high performance and effective recruiting?
Setting aside the fun associated with scheduling (and rescheduling) committee meetings to accommodate the schedules of directors who serve on multiple boards, it goes to staying well informed and on top of your systems – and communicating on these matters with your board chair and other appropriate parties. Has your board established or revisited a policy that limits the acceptable number of board and committee director interlocks? If so, is the policy written in plain language and publicly accessible? Do current matrices and recruitment practices reflect a cautionary watch out for overboarding, and board or committee interlocks? These may be just a few relevant topics for an upcoming conversation with your chair.