Much of the media discussion of multiple directorships has been based on the assumption that the issue is widespread and the consequences are invariably undesirable. I would like to suggest an alternative view. Recent Australian research shows that only three out of every 100 directors hold three or more concurrent directorships, while 80 per cent of all directors of listed companies hold only one position. The total number holding more than five director positions among the top companies is as low as twenty. This is not a serious problem requiring regulatio
Mr Stuart Wilson
Chief Executive Officer
Australian Shareholders Association
PO Box 519
CHATSWOOD NSW 2057
6 January 2005
Dear Stuart,
I am writing in response to your letter seeking suggestions and comment about how to judge whether or not an individual non-executive director is overcommitted.
Much of the media discussion of multiple directorships has been based on the assumption that the issue is widespread and the consequences are invariably undesirable. I would like to suggest an alternative view.
Recent Australian research shows that only three out of every 100 directors hold three or more concurrent directorships, while 80 per cent of all directors of listed companies hold only one position. The total number holding more than five director positions among the top companies is as low as twenty. This is not a serious problem requiring regulation.
Directors who hold more than one board position can bring wide experience to the boards concerned, adding value to the firms. Setting a limit to the number of directorships would set a limit to this experience. It could force boards to pay more to attract directors or reduce the pool of experienced directors available for board appointments.
The size of a company and the complexity of the issues its board faces are critical factors in determining the workload of directors. These vary so widely from one company to another that there is no logical basis for numerical limits on directorships, as you propose. The personal capacities of individuals and the depth of their experience vary widely as well.
The AICD has no difficulty with probing questions from shareholders about a director's capacity to discharge his or her board responsibilities. However, we do not believe that the best way of approaching this issue is through imposition of arbitrary numerical limits on board positions. Why is so much attention being directed toward the multiple board positions of a small proportion of the total director population when the more critical question of evaluating director performance is out of the limelight?
There have been prominent examples of Australian boards whose members have made large time commitments yet failed to avoid problems of great magnitude. Spending more time on the job will not of itself avert disaster. It follows, therefore, that an assumption of over-commitment, due to insufficient time, is ineffective as a predictor of board performance.
The AICD recommends to its members that the number of directorships a person accepts should be limited only by that person's capacity to carry out their obligations properly on behalf of shareholders. Directors should always take into account their workload, especially if they are the chair, and should allow plenty of leeway for fluctuations in board time demands.
Effective evaluation of directors by both boards and the market is the best way to ensure the right balance of board positions. If directors are performing strongly, the number of boards in which they are involved is immaterial.
Shareholders are entitled to ask sharp questions of inattentive directors and they should not accept a director they believe will not add enough value to the company's growth and earnings.
The AICD sees it as being a matter for Chairmen to justify to their shareholders the performance and re-election of directors at Annual General Meetings.
Full disclosure of a director's board commitments should be available to shareholders at the time of re-election to allow an informed discussion of both workload and the experience directors can bring to bear. The primary determinant of fitness, however, should rest with the board's own assessment of each individual's contribution and the board's willingness to support and endorse each director for re-election.
The AICD has commissioned research into this issue and is exploring alternative ways of considering concerns about director performance. This research will not be completed until February 2005. We will be happy to share the results with you when they are available. In the meantime, the AICD would like to register its very strong interest in this area and to ask that you await the results of our research before you reach a final policy position on cross and multiple directorships, particularly where specific numerical limits are involved.
If I might comment more broadly, I would like to encourage the ASA to be more selective in its attacks on boards. For instance, your criticism of the board of AMCOR was in no way justified in terms of the workload of its members. The AMCOR board acted with exemplary speed and decisiveness once it became aware of a cartel in which one of its divisions was allegedly involved. It can hardly be faulted. This was a criminal activity that would have been concealed with care by the managers involved, and I doubt very much that directors with less workload would have identified it sooner.
I appreciate the opportunity to engage in a dialogue with the ASA on an important topic.
Best wishes for 2005.
Yours sincerely,
Ralph Evans
CEO