“May you have the hindsight to know where you’ve been, the foresight to know where you are going, and the insight to know when you have gone too far”
– Irish St Patrick’s Day Proverb
We are seeing more and more discussion, debate and concern about the concept of ‘Overboarding’ in the Boardrooms of our Businesses, Enterprises and Organisations. This is essentially a question of capacity, does the individual sitting on the Board have the ability to effectively contribute to the oversight and strategy of the Business- Enterprise.
It is a good question and an emerging one as the Fund managers, Shareholder Advisors and Compliance Index compilers seek to provide data and information to enable informed ‘voting’ choices on the effective make-up of a Board. This data availability has been used to particular effect on the question of climate change readiness, where individual directors have been voted down due to their lack of climate change credentials. It focuses more attention on the make up of the Board.
These ‘advisors groups’ have now also turned their attention to the question of Overboarding, looking at how many commitments a Board Director has in their portfolio and seeking to assess their capacity to effectively carry out their responsibilities for that Board. Essentially, are they spread too thin to pay enough attention to the challenges and oversight of the Boards they are on. This is a growing issue with Blackrock in the USA, having voted against 163 Directors at 149 companies in 2020-21.
The current UK ‘official’ guidance is fairly open and contained in the FRC ‘Code’, NEDs are required to have the ability to “allocate sufficient time to the company to discharge their duties”, and the requirement for the CEO-CFO to only take on 1 additional FTSE NED role. In the absence of a more helpful and sensible agreed approach, the ‘advisor groups’ have made up their own ‘rules’ which they apply. These can vary from institution to institution, but have broadly settled around an ‘average’ of 4-5 NED roles (mandates). For example, the US Institutional Shareholder Services Group, has a five-mandate limit for Board roles in the UK, where a NED counts as one mandate, a NED Chair role as two and Executive Board role as three.
These approaches are recognised as formulaic and leaving little room to consider the context of an individual Director or the Company they serve. While this is understandable for ease of processing and monitoring, it lacks any attempt at a more subtle contextualising of the actual situation of the Director and Company.
This formula approach creates its own issues and problems which will emerge over time on this important and complex area of Board balance, expertise and effectiveness. We have seen with the compliance index scoring of NED tenure, where theoretically a company is able to extend a NED beyond the ‘9-year standard’, by explaining why the NED’s expertise is important, that this rarely happens, as it has no impact on the Index Score. Consequently, companies don’t bother and 9- years becomes the de facto standard irrespective of the benefit to the company.
In the more complex area of balancing a Board’s expertise and experience this ‘rules based’ approach has a limiting impact. It creates a narrow focus of selection and re- appointment, with a numerical limit. It potentially blocks or removes a key vital skills base from the Board. It assumes the role of a NED is a time serving ‘job’ role with minimal consideration of the need for insightful strategic input. For example, the scarce Board talent of digital expertise becomes even scarcer as the ‘4-mandate’ rule guillotines an appointment or re-appointment. This approach gives little credence to the impact of strategic insight and expert knowledge which is often in short supply at the Board level and the selection process becomes mechanical with little opportunity for creative appointments to the Board. This formulaic approach does little to cater for the need to shape a Board with particular expertise and knowledge vital to the company. How do you ensure you have a ‘Bill Gates’ as opposed to another Ex-Audit Partner on your Board? It is those contrary alternative views and challenges which stimulate a Board to be great.
“Success is a lousy teacher. It seduces smart people into thinking they can’t lose.”
– Bill Gates.
The rules-based approach has some additional problems. How do you rate mandates beyond the Public Listed companies, such as Charity commitments and Public Sector appointments. This approach also isolates the individuals on the Board and forgoes the holistic sense of a Board as a collective endeavour. How do we account for the collective expertise needed by the Board at its different life stages. A Board populated with one mandate NEDs, would be a sterile and diminished environment compared to a Board populated with multiple mandates and with two Directors over mandated in the vital area of technology disruption and digital marketing which are vital to the organisation’s future.
The great strength of a Board is as a collective ‘intelligence’ where the ideas are discussed, debated and challenged as a scenario of benefit to all shareholders and stakeholders. The experience, wisdom and independence of NEDs to go beyond the stereotypical is a hard earned and rare commodity, which needs to be grounded in the needs of the company and not on the needs of an Index or formula. The sense of an over mandated Board with multiple cross over networks and cross sector and functional knowledge and expertise is what Boards should be about.
Why does this matter? The Boardroom is the apex for all companies facing the challenges of increased global commercial turbulence and increased governance oversight. The ability to provide insight and foresight into this chaotic landscape is of ever increasing value in the Boardroom. Consequently, we need a more nuanced approach to the balance of expertise and experience on our Boards. An approach to the ‘whole’ assessment of the Board as a collective, would seem to be more productive, where a few ‘tall poppies’ are able to thrive as both a catalyst for the Board deliberations and an attractor to the future stars of our Boardrooms.
It should not be beyond the wit of Boardrooms and Advisor Groups to achieve this. Indeed the established UK Stewardship forum, as a repository of all the views of the interested parties, should be able to provide a sensible guidance which meets both the requirement to curb excessive overboading, while maintaining a pro-active approach to the collective experience, expertise and knowledge of the Board. We require Boards to open up the gates to a new, wider and more diverse spectrum of Board wisdom, insight and viewpoints. Using a collective Board ‘index’ would have the potential to focus on the specific needs of the Board and the organisation while providing protection against the same faces appearing again and again. This requires both an open dialogue between Boards and Board Advisory groups and a much greater sense of a Board as a development group with an effective Board induction, mentoring and development between Board directors.
Leaving the final words to Bill Gates:
“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don't let yourself be lulled into inaction”.
– Bill Gates
Having insightful and experience Board Directors on our Boards should be our goal and anything which helps us achieve a more nuanced balanced, experienced, thriving and developmental Board environment is to be applauded.
