There is a lot going on at companies, and—you may be surprised to hear—not all of it is new regulation. There are new technologies, such as AI, global political instability and social change, not to mention ESG and cybersecurity. Many of these topics, as they affect a company, fall within the remit of the board for oversight. The energy and time necessary can be overwhelming. In this article, Director Commitments Policies, Overboarding, and Board Refreshment, proxy advisory firm Glass Lewis discusses one way to help ensure that directors have “sufficient time and energy to fulfill their duties and obligations to shareholders”: a director commitments policy. As a corollary, GL maintains, these policies can also serve to boost board refreshment, and can represent a vital measure of corporate governance.
What is a director commitments policy? According to GL, director commitments policies “typically require a company’s directors to only serve on a certain number of outside boards and confirm annual compliance.” At some companies, the policies distinguish between directors who hold executive positions at other public companies and those with no executive positions; some policies also take into consideration whether the director holds board leadership or committee positions and the time commitments related to those functions. GL suggests that policies that take into account outside board leadership roles or committee memberships help boards “evaluate the weight of these greater responsibilities,” and “assess which directors can effectively balance their duties to outside boards and company shareholders.” GL observes that this approach “is in line with investor expectations.” Some policies also require the nominating committee to conduct an annual compliance review of director commitments, in some cases, prescribing a process for evaluation. In addition, some policies provide for director waivers in certain circumstances. GL observes that waiver provisions can be contentious; in a recent GL Client Policy Survey, 48% of investor respondents were against additional leniency for overcommitted directors and 39% of non-investor respondents favored leniency for overcommitted directors.
And, according to GL, these policies are now a key positive element of corporate governance for many companies: among companies in the Russell 1000, 85% have a director commitments policy, and, of those policies, 70% include limits on outside board service.
Why adopt a director commitments policy? GL contends that, by adopting a policy, the board, in effect, lets shareholders know that it recognizes the increased demands on directors’ time, has engaged with directors about those demands and has taken action to confirm that the directors are able to balance their responsibilities and devote adequate time and attention to fulfilling their duties to shareholders. Directors can benefit from the resulting prioritization of responsibilities and reduced reputational and operational risk by avoiding overcommitments, particularly in the event of a crisis when director attention can be critically necessary.
In terms of limits on board seats, what is considered “overcommitted”? In response to GL’s Policy Survey, 89.1% of investors and 92.2% of non-investors set the limit at five boards or fewer for all non-executive directors. GL found that, in the 2023 proxy season, among the Russell 3000, 89% of all directors served on two or fewer boards, 2.5% served on four or more boards, and only eleven directors served on seven or more boards.
GL contends that director commitments policies can also boost board refreshment. Board refreshment can be useful in promoting turnover that allows boards to pursue diversity—in skills, professional experience, gender, race/ethnicity, demography or other background characteristics. GL observes that, in years past, board refreshment would result from age-based mandatory retirement policies and term limits. But recent studies have shown that the use of these types of board limitations has declined. (See the SideBar below.) Instead, replacing these hard limits are director commitments policies, board self-evaluations and other tools that “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.”
GL highlights that, for some institutional investors, director commitments policies are important to evaluating board and director performance, and, as a component of their own proxy voting guidelines, have required that nominating committees have these policies in place.
Because GL believes that a director commitments policy can help mitigate the risks of overcommitment, in January 2024, GL began to track whether Russell 1000 companies have a director commitments policy with a numerical limit and will display that information in its Proxy Papers. In addition, while not creating an exception, disclosure of a director commitments policy will be considered in GL’s analysis of overcommitted directors.
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