Most executive employment agreements include a standard provision that permits executives to serve as directors of up to two outside companies at any given time during their employment. This provision, however, should be anything but standard. The demands of board service – the time attention and energy required – will vary depending on the company, the role a particular director plays, and the unique challenges that company might face at a given time.
A crisis at a company where an executive serves as director can be a significant distraction that diverts the executive’s attention from his or her everyday duties. As stated in the Glass Lewis Guidelines for U.S Companies, “We believe that directors should have the necessary time to fulfill their duties to shareholders. In our view, an overcommitted director can pose a material risk to a company’s shareholders, particularly during periods of crisis.”
Indeed, executive “over-boarding” is an issue has come under increasing scrutiny in the last several years. Executives are over-boarded when they sit on more boards than they can reasonably serve while at the same time meeting the demands of their day jobs. Several years ago, investor watchdog organizations such as Institutional Shareholder Services (ISS) and Glass Lewis & Co. began to include guidelines relating to over-boarding in their proxy voting policies, and those guidelines have been tightened since they first were quantified.
Glass Lewis’s guidelines discourage the appointment of directors who are executive officers of public companies serving on more than two boards including their own boards. ISS recommends voting against or withholding votes from directors who serve as the CEO of a public company while serving on the boards of more than two outside public companies. Vanguard’s proxy voting guidelines for U.S. Companies in its portfolios mandate a “no” vote for a director nominee who is also an active CEO and sits on more than one outside public board.
The concerns underlying these restrictions are well-founded. Recent research demonstrates that the time commitment required for public company directors has dramatically increased of late. According to the National Association of Corporate Directors (NACD), the average board member’s time commitment for board service increased nearly 30% between 2006 and 2016 to 248 hours per year. That is the equivalent of more than six 40-hour workweeks.
This time commitment is sure to increase as new challenges present themselves, such as new regulatory compliance requirements and evolving cyber security risks. Yet, the 2018 Spencer Stuart Board Index found that only 22% of S&P 500 companies had limits in their corporate governance guidelines on their own CEOs’ outside board service; 16% limiting such activities to two outside board seats and 8% capping such service at one seat.
Outside board service can and often does provide substantial benefits and valuable experience to executives, experience that ultimately inures to the benefit of the companies employing those executives. However, those benefits must be weighed against the costs of such service. These factors must be carefully considered in constructing executive employment agreements.