Proxy Voting Policies Focus on Overboarding

November 2015

Proxy Voting Policies Focus on Overboarding

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Two of the leading governance services providers, Institutional Shareholder Services Inc. (ISS) and Glass Lewis & Co., are focusing on the continually increasing time required of board members of public companies and have reconsidered their policies related to the number of concurrent directorships that boards members can effectively hold at a given time to counter “overboarding.”

In November 2015, ISS released its 2016 updates to its benchmark proxy voting policies. The policies will generally be applied for shareholder meetings on or after February 1, 2016. Key U.S. benchmark policy changes include a change to ISS’s director overboarding policy. For most directors except for standing CEOs, the maximum number of public company boards that a director can sit on before being considered “overboarded” is being reduced from six to five.  There will be a one-year grace period until 2017, giving directors and companies sufficient time to make any changes in advance of the 2017 proxy season, should they wish to do so. During 2016, ISS research reports will highlight if a director is on more than five public company boards, but adverse voting recommendations will not be issued under this new overboarding policy unless the current maximum of six boards is exceeded. For CEOs, the current overboarding limit will remain at two outside directorships.

Prior to the 2016 update, ISS had set limits of six directorships for most board members and three total board memberships - service on the home company board and two outside directorships - for sitting CEOs in response to rising investor concerns about over-boarding and academic research questioning the performance of “busy” directors. In support of the current change, ISS cites the National Association of Corporate Directors’ (NACD) 2014-2015 Public Company Governance Survey which indicates that respondent directors of public companies now spend an average of 242 hours a year (or more than 30 eight-hour work days annually) on board service. This typical time commitment jumps up to 278 hours (or nearly five more eight-hour work days) when you add in the survey respondents’ estimates of additional time spent in informal meetings/conversations with management. In contrast, the average annual director time commitment reported by NACD’s survey respondents in 2015 was 190 hours (or fewer than 24 eight-hour work days).1 For more information and additional ISS proxy voting policy changes impacting the Americas, EMEA, and Asia-Pacific regions, refer here.

Glass Lewis has also recognized that the time directors are devoting to their board obligations has increased in recent years. That, coupled with increased investor scrutiny of directors’ commitments, has resulted in directors serving on fewer boards. Therefore, Glass Lewis has indicated that in 2016 it will closely review director board commitments and may note as a concern instances of directors serving on more than five total boards, for directors who are not also executives, and more than two total boards for a director who serves as an executive of a public company. Their voting recommendations in 2016, however, will be continue to be based on their existing thresholds six total boards for directors who are not public company executives and three total boards for a director who serves as an executive of a public company. Beginning in 2017, Glass Lewis will generally recommend voting against a director that exceeds the new directorship thresholds of five (nonexecutive officer directors) and two (executive officer directors), respectively. For more information on this and other Glass Lewis proxy voting policies, refer here.

Many companies already place their own determined limits on directorships of their board members based upon their understanding of the demands on board members’ time and the concerns expressed by their investors. BDO encourages boards to continually self-assess and consider the broader obligations, experience levels, and capabilities of all of their board members and the various roles and responsibilities they are expected to provide the companies they serve. We encourage you to explore the resources cited as you fulfill your duties on behalf of the boards and companies that you serve. For additional audit committee tools and resources, visit BDO’s Board Governance page.

For questions related to matters discussed above, please contact Amy Rojik or Tom Ziemba.

1 NOTE: The 2015-2016 NACD Public Company Governance Survey indicates that on average, directors spent a total of 248.2 ours on board-related matters in the past year and board chairs spend an average of 292.1 hours on board duties. This is inclusive of director estimates related to informal meetings or conversations with management.  Among other findings, the survey also indicates that director turnover has steadily increased over the past four years from 41% to 72% of respondents who reported to have replaced 1 or more directors.