When governance nerds hear the term “public employee pension fund”, they may think of CalPERS or CalSTRS, the California giants. However, Florida has its very own State Board of Administration, which manages not only our public employee funds, but also our Hurricane Catastrophe Fund. I’m a big fan of the governance team at the Florida State Board; I don’t always agree with their views, but they are smart and fun and a pleasure to talk to.
The Florida State Board has just published an interesting – and mercifully brief – report on over-boarded directors – i.e., men and women (OK, usually men) who serve on too many boards. The report, entitled Time is Money, is subtitled “The Link Between Over-Boarded Directors and Portfolio Value”, and the following are among its key points:
- Boards with above-average levels of directorships had lower average five-year stock performance.
- There is a near inverse relationship between the level of directorships and TSR across one-, three- and five-year time spans.
- Companies with the highest levels of directorships among its board members performed worse than other companies with lower average directorships.
The Florida State Board governance principles suggest that directors have less than four directorships. In fact, as the report points out, many companies agree – in fact, 77% of the S&P 500 limit the number of board seats that their directors can hold. And 24% set additional limits on directors who are public company CEOs or otherwise fully employed.
A few other interesting items:
- The Florida State Board report examines many types of board memberships – including service on boards of private companies and non-profits. Under SEC rules, companies are only required to disclose only the public company boards on which their directors serve.
- Notwithstanding the key points above, there are studies indicating that, at least in some cases, “busy directors may bring positive synergies across firms and potentially offer strategic interaction among all directors”. However, these synergies may fail to occur when the companies in question “have…little in common informationally”.
- While “over-boarded directors attend significantly fewer board meetings and were associated with lower-performing companies”, “these effects were reversed for younger companies, possibly due to positive effects of director networks for emerging and growing companies”.
There are numerous studies (including some cited in the report) that public company directors spend significant amounts of time – on average over 250 hours per year – on board business. And that figure will increase big-time if a company hits some bumps in the road or undertakes a significant acquisition of divestiture. So it strikes me as entirely reasonable, if not desirable, to consider limiting the number of boards on which a director serves.