Let's posit a couple of things about corporate directors.
One is that the job is much harder than it was many years ago, before the corporate scandals of this millennium ushered in plenty of new regulations and director duties. The olden days, alleged to consist of brief board meetings followed by vigorous golfing, are a thing of the past. The typical Canadian corporate director spends 300 hours per year fulfilling his or her duties, according to a 2014 survey by Korn Ferry.
Two is that at the same time, compensation for directors has risen sharply. Most public companies of a meaningful size pay their directors six figures, and board members at the largest companies can earn multiples of that. It is nice pay for what is fundamentally a part-time job.
So it may not be surprising that many directors are happy to sit on more than one board. For some, more than four, five, or six, even. So many boards so that it's not really part-time work at all. And enough boards to raise the question of whether each of the companies is getting the proper amount of attention.
That is why Institutional Shareholder Services, the main governance advisory firm, is toughening its standards in 2016 for what it considers "overboarded" directors. ISS is lowering the number of boards a director can sit on before they recommend that their clients – the institutional shareholders who are looking for governance advice – withhold their votes for an overboarded director.
The changes mean that ISS's Canadian policy for director overboarding, once more lenient than the U.S. rules, is now at least more rigorous, and arguably tougher.
Here's how the policies work: Currently, ISS considers a director "overboarded" if the director serves on more than six public company boards. If the director is a CEO of a public company, the limit is two boards in addition to the board of the CEO's own company.
In the 2017 spring proxy season, however, ISS will reduce its overboarding threshold in the U.S. to five total directorships, while leaving the CEO limit at two additional boards. In Canada, however, the limits will be reduced to four total boards for non-CEO directors, while CEOs are permitted to serve on only one additional board before being considered "overboarded."
Here's the mitigating factor: In the U.S., the overboarding limits are hard and fast: If a director exceeds them, ISS recommends a "no" vote.
In Canada, however, "no" votes require what ISS calls a "double trigger": The overboarded director must also fail to attend 75 per cent of the required board and committee meetings before ISS recommends a "no" vote. (ISS will consider extenuating circumstances such as health issues.)
Under the current policies, where the U.S. and Canadian definitions of overboarding are the same, the double-triggered Canadian policy is unquestionably softer. With the new, lower thresholds in the Canadian policy, however, that is no longer the case.
Why the differences? Deborah Sisti, head of Canadian research for ISS, says that while the two countries' regulatory principles are similar, the corporate cultures are different: The U.S. is very rules-based, while Canada gives "flexibility and consideration" to board structure, she says.
Institutional investors in Canada have suggested that there be other considerations in an overboarding determination, with a director's actual attendance being an obvious and important one. "If a director is unable to meet at least 75 per cent of their board and committee meetings, that's probably a good indicator right there that they don't have the time to commit to the number of boards that they're sitting on," she says.
The double-trigger policy makes a big difference – and suggests that lowering the threshold won't result in a wave of "no" recommendations in 2017.
To study the impact of its policy change, ISS identified 5,953 directors on TSX-listed boards, 716 of the CEOs, from September, 2014, to September, 2015.
Under current policy, 40 non-CEO directors were overboarded; the new policy increases that number to 267, an increase of 568 per cent. Overboarded CEOs increase from 174 to 329 under the new policy.
Applying the attendance rule, however, meant that none of the 40 currently overboarded directors, and only six of the 267 newly overboarded directors, would get a "withhold" recommendation. Of the 174 overboarded CEOs under the current policy, just six received "withhold" recommendations; that number would have increased to 14 under the new, lower thresholds.
It seems, then, Canada's "flexibility and consideration" about busy directors means shareholders won't be asked to throw that many, well, overboard.
David Milstead