The increasing strain on directors’ time is a growing concern among institutional investors and shareholder advocates. External risks stemming from new technologies, environmental and societal changes, and destabilizing market conditions all demand greater attention and care from the board. As the responsibilities associated with the role expand to cover topics like ESG and cybersecurity risk oversight, as well as increased disclosure and reporting requirements, so do expectations around committee performance and stakeholder engagement.
One of the ways that boards can ensure that directors have sufficient time and energy to fulfill their duties and obligations to shareholders is through a director commitments policy. Director commitments policies can also serve as a method to increase board refreshment, and as a metric of a company’s corporate governance. Some large institutional investors have even incorporated director commitments policies into their own proxy voting guidelines.
In this post, we examine how director commitments policies can serve to mitigate risks relating to overcommitted directors, as well as to promote board refreshment. We also discuss their impact on proxy voting, and how Glass Lewis has integrated these policies into our Proxy Paper analysis and voting recommendations.
What is a Director Commitments Policy?
Director commitment policies typically require a company’s directors to only serve on a certain number of outside boards and confirm annual compliance, ensuring that directors can fulfill their commitments while balancing their responsibilities. In the report, “Board Refreshment and Evaluations” (2022), The Conference Board asserts that director commitments policies are an effective way of ensuring that directors are not overcommitted and can prompt a thoughtful discussion between companies and their board members.
Glass Lewis data shows that director commitments policies have become a significant component of corporate governance. Within the Russell 1000, 85% of companies have such a commitments policy, with 70% of those policies limiting the number of outside boards on which a director may serve.
Different Types of Roles, Different Levels of Commitment
Some policies also differentiate between directors with solely non-executive commitments and directors who maintain executive positions at other public companies, and can include consideration of the time commitments associated with board leadership positions such as board chair, lead independent director, and committee roles. While not universal, this approach is in line with investor expectations. In our 2023 Client Policy Survey, we asked whether board leadership roles should be taken into account when assessing commitment levels; 82.4% of investor respondents answered that committee memberships and chair roles should be considered.
Monitoring & Enforcement
Some policies require an annual review of director commitments by the nominating committee to ensure that all directors are compliant with the policy, with some including the process by which the nominating committee evaluates a director’s time commitments. They may also include a mechanism to provide directors with a waiver from such policies, subject to certain conditions.
The inclusion, and use, of waivers is a contentious topic. In our Client Policy Survey, 48% of investor respondents believe that a robust director commitments policy should not provide additional leniency to overcommitted directors. Conversely, 39% of non-investor respondents say that a director commitments policy should provide leniency to an overcommitted director.
Value to Directors, Boards and Shareholders
Director commitments policies reinforce positive relationships between directors, boards, and shareholders. One corporate respondent to our Client Policy Survey commented that the adoption of a director commitments policy indicates a clear focus by the board on this topic, and that it is reasonable for investors to consider such a policy when considering overcommitted directors.
By adopting a director commitments policy, the board signals to shareholders that they are aware of the increasing strain on directors’ time and have instituted measures to ensure that the directors are able to fulfill their duties to shareholders. The board also demonstrates a willingness to engage in a thoughtful dialogue with directors to ensure they can continue to fulfill their duties to shareholders, minimize risk, and maximize shareholder value. Compliant directors benefit from lessened responsibilities and increased prioritization that further enables them to effectively serve shareholders.
Outside board commitments policies mitigate inappropriate risks from overcommitted directors by ensuring that directors can meet their obligations to shareholders and dedicate the time and attention necessary to be an effective director. Additionally, compliant directors will benefit from reduced reputational risk and operational risk through limiting their own responsibilities and avoiding overcommitments.
Reducing Risks Posed by Overcommitted Directors
In the 2023 proxy season, Glass Lewis found that 89% of all directors in the Russell 3000 serve on two or fewer boards, while only approximately 2.5% of all such directors serve on four or more boards. Notably, only eleven directors serve on seven or more boards.
In our Client Policy Survey, 89.1% of investors and 92.2% of non-investors responded that all non-executive directors should serve on five boards or fewer, which aligns with Glass Lewis’ benchmark policy. Glass Lewis views such overcommitted directors as a risk to companies particularly because directors who are overcommitted may not be able to dedicate sufficient time to the boards on which they serve when one of the companies faces a crisis.
One example of a crisis requiring additional capacity is Norfolk Southern’s February 2023 train derailment in East Palestine, OH, which the company continues to address. In the aftermath of the incident, Norfolk Southern faced a justice department lawsuit, heightened investigations into company operations from both the state and federal level, and cascading safety concerns and incidents. Despite the mounting issues, the company and board were able to respond with investments, grants, and remedial environmental measures to restore goodwill and trust in the company.
On October 26, 2023, the company announced that soil excavation has been completed, marking a major milestone for remediating the environmental consequences of the train derailment. The company discloses that more than $96.5 million has been invested in East Palestine and the surrounding areas. On December 18, 2023, the company announced that it has distributed nearly $5 million in local grants as part of its Safety First and Thriving Communities grant programs.
The incident and its aftermath required constant attention from the board and management. Overcommitted directors would have been far less likely to devote sufficient attention, and it is possible that the company’s response and actions would be lackluster. Since none of the directors on Norfolk Southern’s board are overcommitted, and the board has adopted a director commitments policy limiting the possibility of any overcommitted director, the company and its directors have been able to devote sufficient attention to this complicated incident.
Impact on Board Refreshment
Director commitment policies also serve as a tool for encouraging board refreshment. Board refreshment policies, such as mandatory retirement provisions and term limits, help promote turnover that supports growing a board’s demographic diversity, skills, and experience. However, in recent years, companies have moved away from traditional limits that mandate turnover, and instead have embraced policies and procedures that encourage discussions of refreshment.
The Conference Board has found that, in the S&P 500, the percentage of companies with mandatory policies based on age dropped from 70% in 2018 to 67% as of July 2022, and in the Russell 3000, from 40% to 36% (The Conference Board. “Firms Move Away from Mandatory Director Retirement Policies and Pursue Other Ways to Achieve Board Refreshment.” August 8, 2022). Replacing these hard limits are tools such as director commitments policies, mandatory resignations upon changes in professional occupations, guidelines of average board tenure, and board-wide and individual director evaluations. These provisions support assessments of a director’s role on the board and of whether they are the best fit for the company. Director commitments policies support these assessments by identifying which directors are compliant and can devote enough time to their responsibilities, and those that have too many responsibilities and may pose a risk to the company.
Additionally, in cases where a director commitments policy includes considerations of outside board leadership roles or committee memberships, such a policy helps boards evaluate the weight of these greater responsibilities. One institutional respondent to our Client Policy Survey commented that boards should consider the totality of commitments of their directors, including committee membership, but greater weight should be given to outside board leadership roles. By encouraging an evaluation of outside responsibilities, director commitments policies help boards assess which directors can effectively balance their duties to outside boards and company shareholders.
Director commitments policies are a positive component of corporate governance. Not only do they help directors balance their responsibilities, but they also provide evidence to shareholders that boards are taking the increasing time demands of their responsibilities seriously. Furthermore, such policies help boards maintain active refreshment.
Director Commitments Policies in Proxy Voting
Director commitments policies are quickly becoming a focal point of evaluating board and director performance. Indeed, certain institutional investors have added the presence of a director commitments policy to their own proxy voting guidelines. These investors believe that it is the responsibility of nominating committees to have such a policy in place to regularly evaluate directors’ time commitments and effectiveness.
Glass Lewis recognizes that the risks posed by overcommitment can raise concerns with both the capacity and performance of the individual director in question, and with nominating committee oversight more broadly. We believe that the presence of a director commitments policy can help mitigate risks associated with overcommitted directors, and can help shareholders to understand and evaluate the process by which boards weigh their directors’ time commitments.
Thus, beginning January 2024, Glass Lewis tracks whether Russell 1000 companies have a director commitments policy with a numerical limit, which will be displayed as a data point in our Proxy Papers. Furthermore, while we currently do not make exceptions to our guidelines based on a board’s disclosure of a director commitments policy, they will be considered in our analysis of overcommitted directors.