How firms can benefit from busy directors

Directors who sit on multiple boards are increasingly being blamed for poor performance; however, their diverse skills and experience can bring real value to a business.

The corporate world is clamping down on busy directors. In recent years, shareholder activists and advisers have increasingly been speaking out against those who hold seats on multiple boards and in some cases have refused to re-elect them.

Critics claim that directors who take on too many roles risk spreading themselves too thinly, are less likely to attend meetings or challenge management and may struggle to find time to deal with a crisis. Some studies have even linked busy directors with poor value outcomes although there is mixed evidence on this issue.

As the backlash continues against ‘overboarding’, the number of board roles held by US directors has fallen significantly in recent years. Despite a small increase in the number of ASX 200 board members holding multiple directorships, gone are the days when it was common to have six or more – the vast majority now have just two or three.

But are busy directors always a bad thing and if so, should companies restrict the number of roles their non-executives can hold? Professor Anne Wyatt, a corporate governance expert at UQ Business School, warns against over-reliance on research carried out in other markets, in particular the US where the average company is larger and the CEO who is running the business and the Chair who is responsible for oversight of operations and governance are commonly the same person.

She says busy directors can be an easy target when seeking the cause of poor performance: “Often when we delve in a little deeper into these cases, it is clear there could be other factors at play. The question is whether the first order problem is busy directors or other underlying factors such as a powerful CEO or an ineffective Chair.”

She believes there can be strong advantages to having directors who hold multiple roles. Being a ‘professional director’ allows them to build their experience and contacts and gives them a broader perspective. They learn to work more closely with other directors, develop greater self-awareness and become more effective at governance. Because they have less time, they are also less likely to be inadvertently drawn into executive management duties, which would be at odds with their monitoring and advisory responsibilities.

“A busy director is a networked director, with industry and business experience relevant to the companies which they advise and monitor,” Professor Wyatt adds, “the diversity of experience can help directors see emerging trends within and even across industries. The busy director has more opportunities to see strategy in action and learn about the strengths and weaknesses of different approaches to growing the business, along with the potential pitfalls. A busy director also understands the importance of knowing what is going on in the company and will recognise when there are information deficits, and have learned how to access this information.

“The question is how to reap the benefits of busy directors, while concurrently having the capability to swing into action and promptly ramp up the time spent in meetings when problems or crises arise.”

Indeed, the problems that have occurred in companies with busy directors have often stemmed from a single event or crisis. A crisis can create huge demands on directors’ time – instead of the usual eight board meetings a year, they may attend as many as 50 in a short period of time and find themselves working round the clock to steady the ship.

However, Professor Wyatt says there could be other ways to resolve this problem – for example establishing a crisis board committee recruited for their experience in crisis management and the ability to down tools and be available when the need arises.

Her own research with colleagues conducted in the Australian market shows that small and large firms often have dramatically different board structures, reflecting their different monitoring and advisory needs. It finds that while busy directors can be beneficial to big companies, what is important for smaller companies is not whether or not directors are busy but their industry relevant skills. Smaller companies have greater demand for technical skills on the board to drive growth and therefore tend to benefit more from ‘hands on’ directors who spend time advising the business.

“While it is generally accepted that independent directors bring advisory and monitoring expertise including the important task of overseeing the CEO’s actions, the benefits a company derives from the different skills depends on its stage of development. Recruiters could consider the company’s stage of development when drawing up the skills matrix for the board,” says Professor Wyatt.

She believes that potentially a bigger issue is the skills and culture brought to the board by the Chair. “The Chair has an extremely important role to play in managing all aspects of the board including the performance of directors and executives,” says Professor Wyatt. “A good Chair knows when a director is overstretched and unable to maintain their contribution to the board, and the goodwill and chutzpah to negotiate a solution that is acceptable to all parties. Independent directors with multiple roles can be a real asset - and the Chair is the safety valve when they are no longer adding value.

“Ultimately the number of directorships is too simplistic a construct to explain poor performance or dysfunction on boards – stakeholders should look more deeply and seek out the underlying cause.”

Last updated:
27 February 2019